Risk sentiment took a bearish turn on Wednesday as concerns over U.S. fiscal health ramped up. The S&P 500 fell and Treasury yields jumped after a disappointing 20-year bond auction underscored investor unease about President Trump’s tax cut plans and the ballooning federal deficit.
The dollar weakened across the board, slipping against all major currencies despite the rise in yields. Gold gained on safe-haven demand, and Bitcoin broke above $110,000 for the first time ever as traders looked for alternatives to dollar-denominated assets.
Here are headlines you may have missed in the last trading sessions!
Headlines:
- CNN reported on US officials who said that Israel is making preparations to strike Iranian nuclear facilities, causing oil price spikes
- FOMC alternate member Beth Hammack thinks “The best action we can take is to sit on our hands”
- Australia Westpac leading index for April: 0.0% m/m (0.0% m/m forecast; -0.1% m/m previous)
- China gold imports surge to 11-month high in April
- RBNZ’s first Tara-ā-Umanga Business Expectations survey showed Kiwi businesses are expecting inflation to rise across all the time periods
- Reuters Tankan poll showed Japanese manufacturers’ business sentiment index slipped from +9 to +8 in May
- UK consumer price index growth rate for April: 3.5% y/y (3.3% y/y forecast; 2.6% y/y previous); Core CPI at 3.8% (3.5% forecast; 3.4% previous)
- UK retail price index y/y for April: 4.5% (4.1% forecast; 3.2% previous)
- GBP Popped Higher On Stronger CPI But Gains Short-Lived
- The ECB Financial Stability Review warned of heightened risks from trade tensions, overvalued markets, and debt vulnerabilities
- FOMC non-voting member Mary Daly said they don’t have enough information for a policy change
- US MBA 30-year mortgage rate for May 16: 6.92% (6.86% previous); mortgage applications for May 16: -5.1% (1.1% previous)
- Canada new housing price index for April: -0.6% y/y (0.2% y/y forecast; 0.1% y/y previous); -0.4% m/m (0.1% m/m forecast; 0.0% m/m previous)
- U.S. EIA crude oil stocks change for May 16: 1.33M (3.45M previous)
- Oman’s foreign minister said a fresh round of nuclear talks between Iran and the U.S. would take place in Rome on Friday
Broad Market Price Action:
Dollar Index, Gold, S&P 500, Oil, U.S. 10-yr Yield, Bitcoin Overlay Chart by TradingView
The major assets took cues from individual catalysts on Wednesday as worries about the U.S. fiscal outlook took center stage.
U.S. President Trump’s massive tax cut proposal, which could balloon the federal deficit by trillions in the next decade, triggered a sharp sell-off in Treasuries and led to a weak 20-year bond auction. The bid-to-cover ratio came in at just 2.46, well below the recent average of 2.58, sending yields on that maturity to 5.047%. This came on the heels of Moody’s recent downgrade of U.S. sovereign credit, further fueling the anxiety.
U.S. stocks didn’t take it well. The S&P 500 dropped 1.61% as the 10-year Treasury yield surged 11.5 basis points to 4.60%, the highest since February. Gold got a lift from all the uncertainty, rising to $3,315, with demand also boosted by a spike in China’s gold imports to an 11-month high. Bitcoin soared to a new record high just above $110,000, driven by easing U.S.-China trade tensions and a broader move into non-dollar assets.
Oil prices gave up earlier gains, sliding toward $61 a barrel as U.S. inventory data pointed to oversupply and headlines suggested U.S.-Iran nuclear talks were back on. Meanwhile, European equities were a mixed bag. Germany’s DAX edged up 0.36%, while France’s CAC 40 slipped 0.4% as traders digested hotter-than-expected U.K. inflation data.
FX Market Behavior: U.S. Dollar vs. Majors:
Overlay of USD vs. Major Currencies Chart by TradingView
The U.S. dollar slid in Asian trading, extending the previous day’s losses as concerns over the U.S. fiscal outlook lingered after Moody’s downgrade. A surprise trade deficit out of Japan offered little support, and USD/JPY stayed under pressure for a sixth straight session, marking its longest losing streak since March 2017.
There was a brief pause in the selloff during the European session after UK inflation came in hotter than expected at 3.5% versus 3.3%. That surprise led traders to dial back Bank of England rate cut expectations, giving the dollar a lift against most currencies except Sterling.
But the pressure came roaring back around the U.S. session open. A weak 20-year Treasury auction, the first since the Moody’s downgrade, sent yields jumping to 5.047% as demand fell short. The bid-to-cover ratio came in at 2.46 compared to a ten-auction average of 2.58.
That triggered a broader dollar selloff even as the 10-year yield climbed 11.5 basis points to 4.596%. The fact that the dollar fell despite rising yields points to deeper investor skepticism about the U.S. fiscal outlook and signals that higher yields are not enough to attract buyers.
The dollar managed a modest recovery into the close but still ended lower against all major currencies.
Upcoming Potential Catalysts on the Economic Calendar:
- Australia S&P Global manufacturing and services PMI flash for May at 11:00 pm GMT
- Japan machinery orders for March at 11:50 pm GMT
- New Zealand budget economic and fiscal update
- Japan Jibun Bank manufacturing and services PMI flash for May at 12:30 am GMT
- Japan BOJ Noguchi speech at 1:30 am GMT
- UK public sector net borrowing ex banks for April at 6:00 am GMT
- HCOB France manufacturing and services PMI flash for May at 7:15 am GMT
- UK BOE Breeden speech at 7:15 am GMT
- Germany HCOB manufacturing and services PMIs flash for May at 7:30 am GMT
- Germany Ifo business climate for May at 8:00 am GMT
- Euro Area manufacturing and services PMIs flash for May at 8:00 am GMT
- UK S&P Global manufacturing and services PMI flash for May at 8:30 am GMT
- UK CBI industrial trends orders for May at 10:00 am GMT
- Euro area ECB monetary policy meeting accounts at 11:30 am GMT
- UK BOE Dhingra speech at 12:00 pm GMT
- Canada raw materials prices for April at 12:30 pm GMT
- Canada producer price index for April at 12:30 pm GMT
- UK BOE Pill speech at 12:30 pm GMT
- US initial jobless claims for May 17 at 12:30 pm GMT
- US Chicago Fed national activity index for April at 12:30 pm GMT
- US S&P Global manufacturing and services PMI flash for May at 1:45 pm GMT
- US existing home sales for April at 2:00 pm GMT
- US Kansas Fed manufacturing index for May at 3:00 pm GMT
- Euro Area ECB Guindos speech at 3:35 pm GMT
- US Fed Williams speech at 6:00 pm GMT
- Canada BOC Gravelle speech at 7:15 pm GMT
- US Fed balance sheet for May 21 at 8:30 pm GMT
- New Zealand retail sales growth for March 31 at 10:45 pm GMT
- UK GfK consumer confidence for May at 11:01 pm GMT
- Japan consumer price index growth rate for April at 11:30 pm GMT
Traders are in for a BUSY calendar day as a flurry of PMI releases and speeches from BOE and ECB officials could drive short-term volatility in EUR and GBP pairs, especially if growth signals diverge.
In the US, traders will eye jobless claims, PMI flash data, and housing figures to gauge whether the economy is cooling enough to keep interest rate cut hopes alive.
As always, stay nimble and don’t forget to check out our Forex Correlation Calculator when taking any trades!