Macro Tides Weekly Technical Review February 7th 2022
Macro Tides Weekly Technical Review
Dollar
The Euro comprises 57.8% of the Dollar Index so trend changes in the Euro have a big impact on the Dollar. The Dollar was expected to top at 97.50 – 97.75 and it reversed lower after reaching 97.44. The Dollar dropped below 95.83 which confirmed the high. The price reversal in the Dollar was identified well before the ECB’s meeting. The Dollar is expected to bounce after the recent sharp break and then fall below 94.00 before a tradable low develops.
ECB
During our weekly conversation on January 28 Blake Morrow and I talked about the Dollar (topping) and the Euro. Blake asked if that meant the Euro was bottoming and whether the Euro should be bought. I noted that the Euro was completing 5 waves down and should be bought. The Euro was trading near 1.1155 as indicated by the vertical line.
You can listen to our entire conversation here.
The ECB met on February 3 and the record increase in inflation to 5.1% was too big to ignore. The Governing Council’s statement said changes were coming. “It’s sensible not to exclude a rate hike this year and an end of bond-buying under the APP in the third quarter is possible.” The Governing Council teed up more changes at the March meeting as it said it “The GC Sees policy change at the March meeting if inflation doesn’t ease.”
The reaction in European bond markets was swift and sizable. The German 10-year Bund traded above 0% for the first time since March 2019 and up from -0.38% in December to 0.20% on February 7. Five-year yields in Italy, Greece, and Germany soared. The German 2-year yield moved above -0.30% for the first time since November 2015. The increase in European yields is approaching a short term high as positions in EU debt instruments are rebalanced for the ECB’s policy shift. Based on the ECB’s pedigree it is not likely to lift rates aggressively and may not shrink its APP purchases as much as the debt market is pricing in. The Governing Council had to respond after the inflation report but that is likely to change if inflation recedes by mid-year. Oh, and the Euro rallied from 1.1155 to 1.1483 which is a big move in one week.
Treasury Yields
Treasury yields were expected to exceed recent highs. “The Intermediate Trend for the 10-year Treasury is still up and the price pattern suggests the 10-year is likely to rise above the high at 1.874% at a minimum, and the 30-year Treasury yield is expected to rise above 2.192% in coming weeks.” After the ECB hawkish statement on February 3, the perception of strong job gains on February 4, the 10-year pushed up to 1.939% and the 30-year rose to 2.245% on February 7. The Intermediate Trend for both is approaching overbought with a reading of 70 so a high in the near term is likely.
In each week’s Weekly Technical Review I cover economic developments, monetary policy, S&P 500, Treasury yields, Dollar, Gold, Silver, Gold stocks, and when it is timely the Euro and WTI oil.
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