Technical Analysis

US Federal Reserve fails to halt surge in yields

Gurumurthy K | Updated on March 20, 2021

US Treasury yields continue to surge and retain their momentum

The much awaited US Federal Reserve meeting last week turned out largely to be a non-event. Barring the revisions made in its economic projections, the Fed largely kept its stance unchanged on its monetary policy front. Currencies remained broadly stable in a narrow sideways range last week. However, there was some volatility in the equity segment.

Global equities saw some rise after the Fed meeting, but they seem to lack momentum, and did not see a strong follow-through rise.

The Fed’s decision not to extend the relaxation on capital requirements triggered a sharp fall in the US equities on Friday. This might spill over to the Asian equities when they open on Monday.

Fed meeting outcome

The US Federal Reserve last week left the rates and the stimulus quantum unchanged at 0-0.25 per cent and $120 billion per month, respectively. However, the American central bank revised its economic forecasts higher.

The Fed projects the US to grow at 6.5 per cent and the Personal Consumption Expenditures (PCE) inflation to rise to 2.4 per cent in 2021. In December, the Fed had forecast the US to grow at a rate of 4.2 per cent and the PCE inflation to be at 1.8 per cent.

The interest rates are also projected to remain at current levels through 2023. The unchanged policy failed to provide any reversal on the US bond yields. They continued to surge.

Surge continues

The US 10-Year Treasury yield (1.73 per cent) sustained well above the crucial level of 1.6 per cent and extended its rally. The key level to watch this week will be 1.8 per cent.

A strong break above it will see the yields surging to 2 per cent or even to 2.2 per cent from here.

However, from a long-term perspective, 2.2 per cent can be a cap on the upside and the yields can reverse lower from there. On the other hand, if the 10-year yield fails to break above 1.8 per cent, a pull-back to 1.6 per cent is possible. The US PCE inflation numbers out this Friday will be important to watch as it could influence the move in yields thereafter.

Dow could reverse

The Dow Jones Industrial Average (32,627.97) came off from the high of 33,227.78 last week. The Fed decided not to extend the capital requirement relaxations announced as part of Covid relief measures. In April last year, the Fed had excluded the US Treasuries and deposits with US federal banks for the purpose of meeting the capital requirements.

The Fed has now announced that it is not going to extend this relaxation beyond March 31, 2021. This triggered a sell-off in US equities on Friday. This, coupled with the failure to sustain the break above 33,000 earlier last week, can keep the Dow under pressure. A break below 32,500 this week can drag it to 32,000-31,500. Broadly, the index has to decisively breach 33,100 to become more bullish and rise further.

Dollar, euro consolidate

The US Dollar Index (91.74) remained stable last week. A few attempts made to break above 92 failed. The immediate outlook is mixed. There are equal chances to see either a rise to 92.50-93.00 or a fall to 91-90.50 from current levels. However, from a long-term perspective, 93 is a strong resistance that can cap the upside. As long as the index remains below 93, the downtrend that has been in place since March last year will remain intact.

The euro (1.1904) remained below 1.20 all through last week, but was stable. The broader view remains negative. As long as the pair trades below 1.20, the outlook is bearish to see a fall to 1.18 and even 1.17 in the coming weeks. But thereafter, the euro can see a fresh rally from a medium-term perspective. The euro has to decisively rise past 1.21 from here in order to avoid the fall to 1.17.

Rupee stabilises

The rupee (72.5125) strengthened sharply on Monday, breaking above the resistance at 72.60, and made a high of 72.3850. But thereafter, it remained stable and range-bound between 72.3850 and 72.65 for the rest of the week. The rupee can remain stuck inside the 72.40/35-72.60/65 range for some more time. A breakout on either side of this range will then determine whether the currency will strengthen further towards 72.20-72.10 or weaken to 72.80-73.00.

The writer is a Chief Research Analyst

at Kshitij Consultancy Services

Published on March 20, 2021

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