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Analysis

Bond traders prepare for rate hikes

BY Janne Muta

|May 19, 2023

US equities gained yesterday following House Speaker Kevin McCarthy's announcement that a vote on a debt-ceiling deal could occur as early as next week. The S&P 500 (+0.9%), DJ (+0.47%), NAS (+2.02%) all gained ground in a broad market rally that helped the DAX (+1.07%) to break out of a trading range it’s been in since early May. Gold (-1.23%) kept trading lower as the T-Bond market sold off sending yields higher.

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The sell-off in bonds came after the jobless claims dropped more than expected and the continuing claims reached their lowest point since the beginning of March. This was yet another sign of strength in the labour market that’s causing some traders to reconsider their predictions about the Federal Reserve halting rate hikes.

It was expected the Fed wouldn’t need to hike the rates anymore but now the rising dollar and falling treasury prices (and higher yields) suggest otherwise. The yield on the 10-year Treasury note increased to 3.647%, marking its fifth consecutive day of closing higher. Today's main risk event is Fed Chair Powell's speech.

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EURUSD

EURUSD remains bearish below 1.0810 and could trade down to 1.0710. Above 1.0810, look for a move to 1.0860. EURUSD remains bearish as the bond markets expect to see higher rates and push the yields and the dollar higher.

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USDCHF

USDCHF bullish above 0.8976 and could trade to 0.9100. Below 0.8976, look for a move to 0.8950. The market is trending higher in the 8h timeframe and the bull channel low is currently at 0.8976 which suggests the bulls might be interested in engaging the market in the proximity of the channel low (if USDCHF retraced back to the level).

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DAX

DAX broke out of a trading range it’s been in since May 2nd and reached levels that are very close to the January 2022 high (ATH = 16 297). So with DAX almost at an all-time high level, the upside could be now limited. If there’s a retracement back to the range high (16 009), look for a potential bounce from the level.

If DAX keeps on pushing above the current ATH, there are no reference points that would help us to determine potential target levels. Therefore above 16 297, the only option is to follow the price momentum.

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USOIL

USOIL remains bullish above 69.37 and could move to 75.80 and then possibly to 78.30 on extension. Below 69.37, look for a move to 67.80.

The Next Main Risk Events

  • CAD BOC Gov Macklem Speaks
  • CAD Retail Sales
  • USD Fed Chair Powell Speaks

For more information and details see the TIOmarkets economic calendar.

Trade Safe!

Janne Muta
Chief Market Analyst
TIOmarkets

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Janne Muta

Janne Muta is a seasoned market analyst and trading educator with a M.Sc. in Finance. His strategies integrate macroeconomics with technical analysis and he shares his knowledge with the trading community.

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