Market narratives are everywhere at present with competing cross currents hitting traders from all sides. The global energy crisis, supply chain disruptions and the China Evergrande story roll on with central banks perhaps the main actors among all of this. How will they respond and which currencies and markets will be affected the most? The dollar looks well set, buoyed by energy independence and tighter Fed policy soon. Other energy exporting currencies with similarly hawkish polciymakers also look good.

Data points beaten by higher bond yields

Many seasoned traders say that the bond market leads all other markets. In that sense, the breakout in yields to new cycle highs tells us that the November Fed taper is a done deal. More than that, we saw yen capitulation at a time when there is still some uncertainty over the growth and risk outlook, which would ordinarily lead investors to seek safe havens.

Ahead of the US CPI and Fed minutes tomorrow, USD/JPY broke to new cycle highs yesterday and the highest level since December 2018 on the back of rising bond yields. The move looks decisive (on the weekly chart especially) with the next area of resistance around 114-114.50 The latter zone served as resistance on numerous occasions back in 2017 and 2018. The major is overbought on the daily RSI which means we should expect a pullback in some fashion soon. Support sits around 112.80.

Solid UK Jobs Data keeps alive BoE rate hike expectations

Money markets went into overdrive yesterday, and none more so than the sterling market. A 25 basis point hike by the Bank of England is now fully priced in for December this year, with some 8 basis points for next month. Notably, this morning’s UK employment figures did not spike higher as many feared, despite the end of the furlough scheme. And August average wage growth came in on the high side.

This means there is not much to push back on this fairly aggressive rate hike pricing. The high inflation story contrasts with multiple economic tailwinds (fuel, energy and food shortages, Brexit) that are expected to hit the UK in the coming months. The rise in GBP/USD stalled yesterday at 1.3673 and we are back into the range trading around 1.36. The July low at 1.3571 offers the next line of support while the 50-day moving average looms above at 1.3725.

US Q3 Earnings Season is upon us

We also have the small matter of the third quarter earnings season to digest too! In the current landscape of elevated equity valuations and record high profit margins, it may pay to be on our guard for a bout of upcoming profit warnings. These results will be all about increasing input costs and how they are driving margin pressures. We might also see more evidence of how physical and digital companies’ performance is diverging.

Banks are first up with results this week form JP Morgan Chase giving us a good handle of the broader (investment) banking environment, while Bank of America will show us a picture of domestic loan demand. Key will be talk on inflation and the outlook for interest rates, and how customers are being impacted.

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