Fed governor hints at aggressive balance sheet cuts as yield on 10-year Treasuries hits 2.567%

6 April 2022, 03:02

Market Focus

US stocks wavered on Tuesday, dragged down by losses in tech as investors weighed remarks by Fed Governor Lael Brainard that indicated policymakers were ready to act more aggressively to rein in inflation. Investors also monitored reports indicating that the US and EU are expected to unveil more sanctions against Russia on Wednesday. The S&P 500 tumbled 1.26% and the Dow Jones shed 280 points after climbing for two straight trading sessions. The Nasdaq Composite plunged 2.3%, which is its biggest drop in three weeks, and erased gains from a tech rally that helped the index pop on Monday.

The U.S, European Union, and Group of Seven are coordinating on a fresh round of sanctions on Russia, including a U.S. ban on investment in the country and an EU ban on coal imports, following the discovery of civilian murders and other atrocities in Ukrainian towns abandoned by retreating Russian forces.

The government’s plan to increase penalties on Russian financial institutions and state-owned enterprises and will sanction unspecified Russian officials and their family members, said White House Press Secretary Jen Psaki.

“You can expect that they will target Russian government officials, their family members, Russian-owned financial institutions, also state-owned enterprises. It’s a part of the continuation of our efforts to put consequences in place, hold Russian officials accountable,” Psaki told reporters Tuesday, adding that an announcement would come Wednesday.

For now, the ruble seems unaffected by news of the new penalties, and remains sidelined against the greenback.

Main Pairs Movement

The American dollar is the overall winner on Tuesday as it outperformed all of its major rivals. Diminishing chances of a diplomatic solution to the Russia-Ukraine conflict and central banks’ aggressiveness have prompted investred to embrace the safe-haven currency.

At the beginning of the day, the Reserve Bank of Australia abandoned its patient stance, announcing an unexpected boost to the local currency. Governor Philip Lowe dropped the sentence “prepared to be patient” from its usual statement and hinted at an interest rate hike in June. In the American afternoon, US Fed Governor Lael Brainard hinted at an aggressive reduction of the balance sheet and noted that, combined with rate hikes, the Fed would move monetary policy closer to neutral later this year. His words sent the yield on the 10-year Treasury note to 2.567%. Looking ahead, the US FOMC meeting minutes will be published later today.

The Euro pair plunged to 1.0900 while Cable is trading around 1.3076. The Aussie managed to retain some of its post-RBA gains, but pulled down from a fresh 2022 high of 0.7660.  USD/CAD nears 1.2500 as crude oil prices edged lower, with WTI currently hovering around $101.50 a barrel, and Brent at $106.10. Gold was trading as high as $1,944.56 a troy ounce, but is now struggling around $1,920 amid renewed demand for the greenback.

Technical Analysis

AUDUSD (4- Hour Chart)

The Aussie maintains its strong bid tone against the US dollar on Tuesday as the Reserve Bank of Australia loses its patience amid inflationary pressure, signaling an interest rate hike in June. From the technical perspective, AUDUSD has now entered a bullish consolidated phase following the breach of the resistance at 0.7600. Current RSI reading has reached the overbought territory, implying that the upside strength of the currency might pause for a brief adjustment. The pullback has seemed to find a decent support level at 0.7600. Since the MACD indicator continues to support the buyers, some follow-through buying will be seen as a trigger to push AUDUSD toward the psychological resistance at 0.7700.

Resistance:  0.7700

Support: 0.7600, 0.7471, 0.7432

Gold (4-Hour Chart)

Gold turned south following a jump above $1940. On Tuesday, gold once surged above $1940, but rapidly pulled back to nearly $1930 after the Federal Reserve Governor Lael Brainard indicated that the central bank needed to take action on inflation by shrinking the balance sheet rapidly. On the technical side, the four-hour outlook of gold remains neutral as gold continues to consolidate between $1950 and $1920. In the meantime, the RSI reading is hovering around the midline, showing the lack of buyers and sellers. On the upside, gold needs to offer an initial hurdle above $1951.78 to reclaim its bullish stance. On the flip side, failure to defend the immediate support at $1923 will attract sellers to attack the four-day lows near $1915.

Resistance: 1951.78, 1974.4363

Support: 1923.7477, 1878.4351

EURUSD (4- Hour Chart)

EURUSD has been experiencing a difficult time shaking off bearish pressure since last week as the US dollar is supported by the hawkish Fed and the upbeat ISM Services PMI data. From the technical perspective, the outlook of EURUSD remains bearish, developing below its moving averages. At the same time, the intraday downside pressure has dragged EURUSD below its immediate hurdle at 1.0969. With the downside breaking through, it will increase near-term selling interest. The support level awaits at 1.0806. On the upside, EURUSD needs to climb above the near- term ascending trend line, which is around 1.1018 in order to reclaim short-term upside momentum.

Resistance: 1.0969, 1.1069, 101150

Support: 1.0806