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Talking Points:
- EUR/USD edges back towards triangle breakout level.
- USDOLLAR Index stuck in sideways holding pattern since March 29.
- As market volatility rises, it's a good time to review risk management principles.
With the March FOMC minutes due later today, the US Dollar (and likewise, US equity markets) have a chance to crack their ranges from the past week. Unfortunately, it seems unlikely that the FOMC minutes will prove helpful to both parties here; what's good for the greenback is bad for stocks, and vice-versa.
Historically, rising short-term yields reduces equity risk premia, which provokes investors to shift from stocks into bonds. In the event that the FOMC minutes reveal that policymakers are closer to raising rates than markets are currently pricing in (only one rate hike this year: a 51.5% chance of a hike in December), the rise in short-term yields should boost the US Dollar, and the reduction in equity risk premia should weigh on demand for higher yielding assets overall. Generally speaking, bear flattening or bull steepening in the US yield curve is considered bad for stocks.
Read more: Even as Global Equities Slip, USD Impact is Limited
If you haven't yet, read the Q2'16 Euro Forecast, "EUR/USD Stuck in No-Man’s Land Headed into Q2’16; Don’t Discount ’Brexit’," as well as the rest of all of DailyFX's Q2'16 quarterly forecasts.
--- Written by Christopher Vecchio, Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
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