The impact of surging US Treasury yields on the Greenback was offset by broader risk-on market sentiment, leaving the Dollar index trading sideways on Friday

18 October 2021, 03:04

Market Focus

The broad U.S. equity market enjoyed another positive day on Friday to close out the week with positive gains. Strong 3rd quarter earnings and healthy consumer spending propelled stocks higher on Friday. The S&P 500 gained 0.7% to close at 4471.37, the Dow advanced 1.1% to 35294.76, and Nasdaq gained 0.5% to close at 14897.34.

The financial sector reported healthy earnings for the third quarter. Goldman Sachs Group reported earnings of $5.38 billion for the third quarter, a 60% year over year gain. Meanwhile, Morgan Stanley reported a 36% year over year earnings gain.

Retail sales for September increased 0.7%, beating estimates. Rising retail sales figures could ease some investors’ concerns over a slowing economy and inflation.

The U.S. 10-year Treasury yield rose again on Friday, and the benchmark is currently sitting at 1.574%. Oil prices leapt further on Friday as demand for oil picked up as global governments began easing pandemic-era travel restrictions. The U.S. will lift COVID-19 travel restrictions for fully vaccinated foreigners effective November 8th. The Brent Crude future gained 1% to settle at $84.86 a barrel, and the WTI future gained 1.2% to settle at $82.28 a barrel.

Main Pairs Movement

The impact of surging US Treasury yields on the Greenback was offset by broader risk-on market sentiment, leaving the Dollar index trading sideways on Friday. With the benchmark 10-year US Treasury bond yield holding above the critical 1.5% handle, the Dollar has stayed resilient during the early European session on Friday. In the second half of the day, though the upbeat September Retail Sales report slightly boosted the Dollar, the following Michigan Consumer Sentiment Index data underperformed and dragged the dollar index down to the 94.00 threshold.

The EUR/USD pair is treading water on both sides of the 1.1600 level, unable to take advantage of a weaker US dollar. The sterling is the best performer among its main peers. It rallied on Friday to break above 1.3750, reaching 1.3775 for the first time since mid-September. On the flip side, JPY has been the worst performer. The USD/JPY pair surged over 0.5% during the day, and is now trading at 114.30. Commodity-linked currencies are hovering around the familiar levels. The Loonie has settled at 1.2380 at the moment, and Aussie was last seen at 0.7418.

Gold lost most of its Thursday gains and retreated to $1767.61 per troy ounce. Crude oil prices extend further north to fresh highs. WTI is trading at $82.10 as of writing, and Brent once breached the $85.00 price level during the early European session, and has now settled at around $84.70.

Technical Analysis

GBPJPY (4-Hour Chart)

The GBP/JPY cross continued scaling higher through the first half of the European session and once surged to its highest level since June 2016. Bulls are now looking to build on the momentum further beyond the 157.00 round-figure mark.

The momentum took along some short-term trading stops placed near the previous yearly tops, around the 156.00 mark. This seemed to have prompted aggressive short-covering and further contributed to the strong bid surrounding the GBP/JPY cross. With the latest leg up, the cross has now rallied nearly 800 pips from monthly swing lows, around the 149.20 area.

Meanwhile, technical indicators on short-term charts are already flashing overbought conditions and warrant some caution for bullish traders. Hence, it will now be interesting to see if the GBP/JPY cross continues with its positive move or bulls opt to take some profits off the table heading into the weekend.

Resistance: 160.00, 163.90(July 2016 top)

Support: 156.08, 153.50, 149.22

EURUSD (4-hour Chart)

The Euro keeps treading water on both sides of the 1.16 level, unable to take advantage of a weaker U.S. dollar. The common currency bounced up from year-to-date lows at 1.152 earlier this week but is missing a follow-through to post a significant recovery, and is still hesitating between 1.158 and 1.162 for the second day in a row. The U.S. Treasury yields rally, another source of strength for the U.S. dollar, has lost steam this week.

On the technical side, the RSI index is floating a flat movement in the day market and sitting at 57 figures, suggesting slightly bullish movement in short term. On the moving average aspect, the 15-long indicator has turned its slope positive, and the 60-long became a flat movement after the day market. Moreover, two moving average indicators displayed the golden cross in the day market.

In light of two critical technical indicators giving the Euro a positive signal. The one thing left is also the most important obstacle for upside traction: the 1.16 threshold. If the Euro can penetrate the 1.16 solidly, then we expect it will head to a higher stage.

Resistance: 1.161, 1.166, 1.1675, 1.171

Support: 1.153, 1.15

USDCAD (4 Hour Chart)

Loonie is advanced during the New York session, up 0.19%, and is trading at 1.2393 at the time of writing. Upbeat market sentiment has surrounded the market portrayed by U.S. equity indexes rising between 0.17% and 0.92%. WTI, the U.S. benchmark for crude oil, which significantly influences the Canadian dollar, has risen 0.61%, and is trading at $81.42. However, it has failed to lift the CAD. On Friday, BOC Governor Tim Macklem warned that the faster pace of price increases may persist longer than expected, and may slow the pace of Canada’s economic recovery, as global supply-chain issues weigh on the domestic economy.

From a technical perspective, the RSI indicator has rebound from over sought territory to 35 figures, still suggesting bearish momentum in short term. On the moving average indicator, the 15- and 60-long indicators still retain downside movement.

Since the Loonie has broken through a critical support level at around 1.24, we expect that the next pivotal support level will be 1.23. On the upside, the psychological level at 1.25 is still a pivotal resistance for the short-term, with 1.256 following.

Resistance: 1.2425, 1.25, 1.256

Support: 1.23