Yield correction is normal price action
In a previous article, we suggested that the real rate was overbought and likely to normalise. This process is underway; real rates have declined, and the RSI has pulled back (blue rectangle). Given the weekly timeframe above, it will be interesting to see if this is still the case at the end of the week.
This clearance of yield froth has filtered through to other markets. For example, FXCM's USDOLLAR basket is down 0.5% for the week, and the US30 responded positively with a 3.8% increase. This price action is normal behaviour, and we see little change to any underlying fundamentals driving financial markets.
The real rate uptrend remains valid, and the upward green trendline defines its momentum. In this vein, a pullback to test this momentum will be compelling to market participants, given the Fed's current aggressive monetary policy. As such, and until proven otherwise, a dip in the yield uptrend remains our preferred scenario.
Image by krzysztof-m from Pixabay
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.
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