The past week has seen a sharp rise in US Treasury yields, which has helped to fuel a US dollar rebound as well as place renewed pressure on recently rallying equity markets. Stocks began the week on a strong note, mostly driven by better-than-expected corporate earnings early in the current reporting season, which helped to extend the sharp equity rally that has been in place since early April. By late in the week, however, stocks pared their earlier gains as rising yields once again weighed on equities, and Apple Inc., a leading component of the three major US large-cap indexes, took a severe hit when weak earnings guidance from an overseas chip supplier indicated potentially lagging Apple product sales.
Market volatility, as measured by the CBOE’s VIX volatility index, was generally lower on the week, remaining mostly within a consolidation around the 15-17 zone, but was still elevated from recent historical norms. While geopolitical risks remain and heightened tensions surrounding potential global trade conflicts have not gone away, markets have regained at least a small semblance of relative calm when compared with the wild gyrations of recent weeks and months. Perhaps foremost in investors’ minds currently are the potential ramifications of the noted rise in bond yields and the widely-mentioned flattening of the yield curve.
For FX traders, aside from yield speculation, the week ahead will feature major policy decisions by the European Central Bank on Thursday and the Bank of Japan on Friday. As usual, neither central bank is expected to change interest rates at this time. For the ECB in particular, however, further guidance on the potential timing of the end to QE stimulus and possible future interest rate increases will take center stage. Hawkish rhetoric will likely be constructive for the recently struggling euro, while dovish tones are likely to weigh further on the shared currency. In the run-up to these events, EUR/USD has continued to consolidate in a prolonged range, but has dropped this week to a key uptrend line extending back around a year to early 2017, mostly driven by the current dollar rebound. The yen, in contrast, has been heavily pressured within the past month, which has resulted in sharp rebounds for both USD/JPY and EUR/JPY.
Aside from the potentially pivotal ECB and BoJ decisions, the week ahead will also feature key manufacturing and services PMI data from France, Germany, and the eurozone as a whole on Monday; Australian consumer inflation and US consumer confidence on Tuesday; and UK preliminary GDP along with US advance GDP on Friday.