WEEK AHEAD: FEBRUARY 22

Short Description

Rising bond yields have been boosting the US dollar and if they keep going higher, it could send EUR/USD back under the big 1.20 level. I will discuss that and run through the economic calendar for this week in markets. Thanks! Rich

Video Script

Bond yields could send EUR/USD under 1.20 - THE WEEK AHEAD (Feb 22 -26, 2020)

Hi everyone, I am previewing the week ahead in financial markets and I’ve got my eye on the most traded financial contract in the world - the EUR/USD currency pair. US Treasury yields are continuing to rebound and that’s supporting the US dollar. So I’ll investigate whether EUR/USD can hold the big 1.20 level, while also running through the week’s economic calendar.

EUR/USD topped out at 1.2350 in the first week of January this year after finding resistance from the January-April 2018 price range. Since then it dipped back below 1.20 and a rising trendline but managed a rebound to 1.2150, which has since petered out. So really 1.20 is the big line in the sand. In my view another drop below 1.20 opens a possible move back to the September and November lows near 1.16. But if it holds, the uptrend looks intact for another run at 1.2350 and then 1.25.

OK, before I talk more about EUR/USD and yields let’s have a quick run through this week’s economic calendar. We kick off with a People’s Bank of China rate decision on Monday followed by the German February IFO. There’s UK unemployment and Eurozone inflation on Tuesday. The RBNZ are expected to hold rates steady at their meeting on Wednesday. Thursday we have US durable goods orders for January - which based on last week’s retail sales could see an upside surprise - followed by US GDP. Early Friday we have inflation and retail sales data from Japan and finally US personal spending.

Now it’s not the first time I’ve talked about the dollar and bond yields recently. In my January 18 video I talked about higher yields as reason USD/JPY might have bottomed when the price was around 103.50 - now it is above 106 and climbing. So why are yields so important? Well because the yield on government bonds represents what is known as the ‘risk-free’ rate of return in the market. If you assume that the government will always be able to pay you back the money you invested into the bond - the return you earn on the bond has no risk. 

Economic growth is returning but all the printed money is still in the system, which is leading to higher inflation expectations. Something called ‘breakeven inflation’ - one measure of inflation expectations - reached its highest in the US since 2014. If investors expect inflation, they will sell bonds that earn them a lower rate of return than the rate of inflation to avoid negative returns. As we know, when the price of a bond falls, the yield moves up.

Forex traders look to park their money in the currency that has the most chance of seeing higher interest rates in the future- and right now the bond market is telling us that it is in the US where the best returns relative to the risk of default can be earned -and that’s helping the dollar. 

Now, we’ve always got to think about what the flipside of the story is. Higher yields have so far been good for the US dollar. However, if global yields start to catchup - which has already begun to some extent - then the dollar would be less in demand - and that would help the EUR/USD.

Right thanks everyone, good luck trading this week and make sure to subscribe so you don’t miss the next episode of the week ahead.