US dollar, yields dragged lower with consumer confidence, reviving rate-cut bets

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Fed rate-cut bets are on the rise again after following another weak consumer sentiment report weighed on sentiment and warned of a slowing US economy.

In a report titled “Pessimism about the future returned”, consumer has fallen to an 8-month low according to the US Consumer Board. The 7-point month-over-month drop was its fastest deterioration in over three years, and the expectations index fell 9-points to 72.9 – firmly beneath the 80 threshold the CB use to single a likely recession in the next 12 months.

This follows on from another weak consumer sentiment report, which also saw 1-year inflation expectations spike higher according to the University of Michigan. The US services sector entered contraction in February, according to the flash PMI report from S&P Global on Friday. At 47.9, its was the first contraction in two years and was accompanied with higher prices paid. Consumer sentiment

Bets of a Fed interest rate cut are beginning to creep higher, with Fed fund futures implying a 25bp cut in June at 53.6%.

The US yield curve was broadly lower, with the 2 – 30-year rates all falling at a faster pace than their negative 1-year average rate. The 2-year yield traded briefly beneath 4.1% and teased the December low, and finds itself down for a third week. The US 10-year yield is back below 4.3% for the first time this year and amid its 7^th week low – its most bearish sequence since July 2019. 

US dollar index futures (DX) technical analysis

The US dollar index is down -3.6% from its 110 highs, although it’s trying to hold above a 38.2% Fibonacci retracement level (106.02) and 100-day SMA (106.03). A small bullish hammer also formed on Monday to suggest demand around 106, despite the sharp declines of yields.

Ultimately I suspect we could be looking at a move to 105 for the US dollar index, though it is clearly trying to hold 106 for now. The daily RSI (14) is trending lower and not oversold, so any bounces from, here could favour bears who seek to fade into any such move. We also need to factor in an oversold weekly RSI (2), but it can remain oversold for a few weeks at a time before any meaningful bounce occurs.

For now, the bias remains bearish and to fade into moves up to 107 and a move lower to 105, before a larger bounce materialises.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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