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End of the line for the Treasury yields rally? – Market Overview

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Miguel A. Rodriguez
Miguel A. Rodriguez
05 November 2022
Markets cheered the new developments for both European and North American Treasury yields.

The progress in the approval of the fiscal stimulus package in the United States has resulted in the stock markets starting the week positively after the negative behavior of last week.

Influencing this improved investor sentiment is the retreat in the bullish rally for Treasury yields in U.S. and Europe. As a reference, the U.S. 10-year bond has stabilized around 1.43% after reaching 1.60% last week.

Fed's encouraging comments regarding inflation have put a halt to the outflow of bonds. However, the price surges of a large part of commodities and the imminent entry of more funds from stimulus packages are factors that could continue to influence investors' inflation expectations and, therefore, a potential increase in interest rates.

Both European stocks and North American futures rose more than 1% at the beginning of the trading day, with the Tech100 index as the primary beneficiary of this recovery (1.5% increase). Technically, this index has rebounded from the support zone located at 12691, a level close to the 100-day SMA line currently at 12580. Below these previous levels, the uptrend of the last impulse that began in September 2020 would end.

The Forex market

In the foreign exchange market, the U.S. dollar is behaving unevenly, falling against commodity-related currencies, such as the Australian dollar and the Canadian dollar, driven by the rise in the price of raw materials and rising against the yen and the euro. The euro, however, is experiencing widespread declines against all its peers.

Still, the economic figures for the eurozone remain positive. Today the manufacturing PMI for February was published with a rise of 57.9, higher than expected and exceeding the 54.8 of the previous month. But ECB’s statements regarding a potential increase of asset purchases should long-term interest rates suffer upward tensions have had a negative effect on the euro since this measure would mean an intensification of its monetary policy ultra expansive.

Technically, EUR/USD has managed to trade below the 1.2065 zone, and now the critical level is around 1.2022, the level where the 100-day SMA line passes. Below this zone the next technical target is at the 1.1950 level.

Sources: Bloomberg, Reuters.

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Miguel A. Rodriguez
Miguel A. Rodriguez
Financial Writer

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.