- Odds on June Fed rate hike hits 88% as USD rebounds;
- European yields rise as traders anticipate tightening message from ECB next month;
- Commodity bounce aids equities rise but Gold remains under pressure.
As the dust continues to settle on the French election result, it seems calm has returned to financial markets with Monday’s brief relief rally coming to an abrupt halt before attention shifted straight back to the upcoming movements from central banks.
With the eurozone political distraction now seemingly being put to one side, it would appear that traders are once again focused on the upcoming central bank meetings with June being seen as a big month for both the Fed and the ECB. The US dollar is rising for a second day today, having fallen to its lowest level since November prior to this. Traders appear increasingly confident about the prospect of a second rate hike this year in June, with it now 88% priced in according to implied odds from Fed Funds futures rates. A third this year is also more than 60% priced in.
It seems that the passing of the French election has also switched the conversation back to the ECB, with traders anticipating that the central bank will put in place for further reductions in bond buying and possible rate increases by the end of the year. We could get some hint of this in June and with 10-year yields on the rise in European bond markets again today, we may already be starting to see this being priced in.
Having rallied into the French second round result, EURUSD is trading in the red for a second day after failing to hold above 1.10 – an important resistance level for the pair. With the pair having broken below 1.09 today, further downside could be on the cards, with 1.0850 being an important level below.
Equity markets are being supported today, partly by improved risk appetite but more broadly by the bounce in commodity markets. Oil is trading slightly higher today having pared substantial losses over the last couple of days. Still, it continues to hold below a prior support zone, with $50 in Brent and $47.50 in WTI now being notable levels to the upside.
Gold on the other hand continues to trade in the red today, with stronger dollar, improved risk sentiment and reduction in political risk all weighing on the yellow metal. There’s been a notable inverse correlation with the euro over the last few weeks, highlighting the link between political risk and its safe haven appeal but with the election now behind us, that link may start to weaken. With the dollar showing positive signs, Gold may remain under pressure, with $1,220 below being the next notable support level.
