Global financial markets stood still overnight, with any price action confined to weak futures trade moves that the cash markets have been unable to build upon. In the currency arena, only the pound moved more than 100 pips, while the other major pairs have barely passed the 60 pips benchmark, which is half of their daily average trading ranges. Crude oil gained 70 cents overnight, gold loss $4, while the S/P futures gained nearly 2 points.
Trading activity is expected to increase during the U.S. session, but also repeating the pattern of the last few days, where the market tests important swing points during the first part of cash trade, and then spends the rest of the time retracing the moves seen earlier.
This unwillingness to break free from the previous session range reflects the overall indecision in where exactly to invest spare cash: in the debt-dependent U.S., in the problematic Euro-area or in any other economy that tends to mimic the U.S. business cycle. The U.S. dollar has strengthened since December, and from a fundamental point of view, nothing has changed since then.
Turning to interest rates, short-term yields are lower in the U.S. economy, but the long-term yields are markedly higher than in the Euro-area or Japan, and are slightly below those in the U.K. What is more important than the actual level of the yield, are the dynamics, or the rate of change. The U.S. long-term yields are outpacing all others, having increased over the last year at one of the strongest paces on record, at a time that overnight and discounts rates have been held close to zero.
The spread between the short and long term Treasury yield is extremely steep, and shows that investors expect the Fed to raise interest rates at a very fast pace once it starts the cycle of increases. All this points out to further U.S. dollar strength, which in time, could easily lead to a test of the 85.00 area on the dollar index.