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Dollar Strengthens as 10-year Yield Rises to 7-year High

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US Equities

US stocks fell on Tuesday as the US treasury yields rose to multi-year highs. Investors favored the risk-free bonds versus equities. The Dow Jones Futures dropped more than 200 points to put an end to the eight-day winning streak. The Chicago Board of Exchange Volatility Index, VIX, which shows the 30-day expected volatility rose more than 10%. The strong economic reports from the United States confirm that the economy is on the right track and that the FED will continue with the tightening stance, hiking interest rates, which will raise the Treasury yields and add pressure to the stock market.

USD

The dollar index climbed to fresh 2018 highs as retail sales rise for the second consecutive month. The business inventories figure for March also pointed to an improving economy. The US dollar is in favor as investors expect the divergence in the monetary policy between the Federal Reserve and other major central banks to continue. In terms of data, industrial production for April is due today.

EUR

The Euro traded at a four-month low against the US dollar ahead of the Consumer Price Index data today. The common currency was under pressure in early trading yesterday after a disappointment in the first quarter German GDP. The weak economic reports scenario continued with the weaker-than-expected industrial production data. Investors will be monitoring the Eurozone CPI carefully, as a soft reading is expected to delay the tapering  program of the European Central Bank.

JPY

USDJPY rose to the highest level in three months on a strengthening US dollar, rising US yields, and disappointing GDP reading. The Preliminary release of the first quarter GDP dropped below 0% for the first time in two years. The Japanese economy is struggling despite the central bank full easing mode. Analysts expect that a surge in oil prices might help the inflation in Japan to pick up towards the Bank of Japan price target.

Gold

Gold crashed almost two percent to reach new 2018 lows as the economic outlook of the United States strengthens. The strong economic reports are boosting the US treasury yields. The 10-year yields reached 7-year highs which added pressure to the price of the non-yielding bullion. Gold is considered a hedge for inflation for investors, but when the central bank hikes interest rates to tackle inflation, they will favor the risk-free bonds.

Oil

Oil prices ended the day slightly lower as the fear of excess supply is rising despite the OPEC output cut plan. Spot crude oil cargo prices are at their steepest discounts to futures prices as sellers are struggling to find buyers. Moreover, the American Petroleum Institue showed that the US oil supply rose by 4.9 million barrel last week. The official data from the Energy Information Administration is due today.

The most important economic events:

GMT Country Event Expectation Previous
9:00 EU CPI (YoY) (Apr)  1.2% 1.2%
9:00 EU Core CPI (YoY) (Apr) 0.7% 0.7%
12:00 EU ECB President Draghi Speaks    
12:30 US Building Permits (Apr) 1.350 1.354
14:30 US Crude Oil Inventories -0.763 -2.197

 

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