US Open Note – Stocks stabilize and dollar strength lingers

Stocks level as yields support dollar; eyes on Fed Chair’s testimony

US major indices are currently poised after yesterday’s rally that recaptured the ground lost after the Fed’s hawkish shift and indication that tapering is on the horizon, along with two interest rate hikes in 2023. Higher dot plot predictions alongside revised inflation and economic projections have slightly jolted markets.

In general markets are reacting to employment and inflation more than other market drivers and risk appetite today appears subdued, as investors are awaiting Fed Chair Jerome Powell’s testimony before the House Subcommittee, regarding the emergency lending program and current policies related to the coronavirus crisis. Investors may try to decipher corrective language to soften last week’s market blow and look at possible hints, which could affect their expectations of key US data coming up in the week.

Nevertheless, the efficacy of the dollar’s recovery-jab looks potent as the dollar index is holding a tad above 92, but slightly lower from its recently reached high of 92.37. The reflation narrative seems to be up and running, providing dollar buoyancy, with the US 10-year yield currently at 1.45%. The greenback is maintaining its recently acquired lead over its peers, with the reserve currency also regaining an upper hand over the yen, lifting the USD/JPY pair well above the 110 mark.

Stronger US existing home sales of 5.80M beat forecast of 5.71M for May and this is positive for dollar.

The euro and pound are consolidating slightly below the $1.1900 and $1.3900 levels respectively.

ECB signals caution, UK order volume surges

ECB President Lagarde reiterated that progress in vaccinations has strengthened the health conditions and the economic prospects in the euro area, and the ECB needs to remain accommodative as the recovery gains pace, especially as a pickup in economic activity is expected in the second half of the year. Thus it’s likely that today’s Eurozone consumer confidence could hold a clue or two about whether consumer spending is picking up.

With policymakers somewhat hesitant about premature tightening, the ECB plans to maintain the current accelerated pace of asset purchases over the next quarter to safeguard price stability and speed up the recovery. Rising rates would pose a risk to the recovery at this point.

The ECB believes the domino-effect from the hawkish FOMC meeting last week will have limited impact on the euro area. Nonetheless, if the Fed signals a reduction in asset purchases way ahead of the ECB shifting its policy, negative market moves could resonate into the euro area.

The UK’s CBI industrial survey showed factory order volume hit a 33-year high coming in at 19 for June, slightly above expectations of 18. UK manufacturing output is expected to accelerate more in the coming quarter as the economy fully reopens.

Metals heavy while oil keeps optimistic tone

The latest stabilization in gold and silver has assisted the precious metals to hover around the levels of $1,790/oz and $26.00/oz respectively as dollar strength endures, while WTI futures dwindled a tad from their intra-day high of $73.34 per barrel. Oil’s easing could be temporary should tightening of the market occur, especially if large economies’ fuel consumption continues to grow. Despite strengthening oil prices, the loonie struggled to retain command over its dollar counterparty, thus keeping the USDCAD pair floating just beneath the C$1.2400 handle.

Scheduled later at 15:00 GMT, FOMC Member Daly will speak, while the ECB’s Schnabel is due at 17:30 GMT.

Then at 18:00 GMT, Fed Chair Powell will testify before the House Subcommittee.

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