Treasury Prices Rise as Factory Activity Gauge Contracts More Than Expected

April 4, 2023

Treasury prices climbed higher on Monday as a US factory activity gauge contracted more than expected. This news tempered concerns about inflation that were fueled by OPEC+’s surprise decision to cut oil production. Let’s take a closer look at what happened.

In March, the Institute for Supply Management’s gauge of manufacturing activity dropped to 46.3. This was below the median estimate of 47.5 in a Bloomberg survey of economists. Any readings below 50 indicate a contraction, and both measures of new orders and employment decreased. As a result, two-year yields, which are sensitive to policy changes, reversed course after earlier climbing by as much as 11 basis points.

On Friday, the government will release its monthly employment report. This report will provide a more complete picture of the job market. It will be interesting to see how this report affects Treasury prices in the coming days.

Swaps linked to expectations of interest rates from the Federal Reserve indicated that a quarter-point hike in May was more likely than not. This news could also impact Treasury prices in the future.

In the benchmark, energy shares led gains in the S&P 500, with US crude hitting $80 a barrel. Seven out of eleven sectors in the S&P 500 stayed in the positive territory, as energy surged with 4.91% daily gain on Monday.

The Nasdaq 100 underperformed major benchmarks as Tesla Inc. sank on data showing its price cuts barely boosted deliveries. This news is noteworthy, as Tesla is often seen as a bellwether for the tech industry.

Main Pairs Movement

On Monday, the US Dollar experienced a 0.44% decline as investors anticipated a less aggressive stance from the Federal Reserve. The DXY index saw significant selling activity throughout the day, dropping below 102 during the start of the American trading session.

In contrast, the EURUSD pair saw a 0.55% increase in value, with the market mood improving during London’s trading session. The pair continued to rise and surpassed the 1.0900 level during the New York trading session. Similarly, the GBPUSD pair also gained strength following the start of the UK trading hour.

Gold prices rose by 0.78% as the Greenback weakened further after the release of disappointing US economic data. XAUUSD reached a daily high of $1990 before entering a consolidation phase and hovering in a narrow range between $1980 and $1986.

Technical Analysis

EURUSD (4-Hour Chart)

Last Friday, the EUR/USD closed at 1.0836, falling by 0.57% on the daily price range. However, demand for the US Dollar decreased after the opening of London’s trading session on Monday, leading to a recovery of the EUR/USD pair above the 1.07800 threshold, which is the lowest in a week. The pair is currently trading near a daily high of 1.09100 at 1.08891.

US Treasury yields increased ahead of Wall Street’s open, with the 10-year note currently yielding 3.50% and the 2-year note yielding 4.08%. S&P Global released the final estimates of the March Manufacturing PMIs for the Eurozone, with the German figure upwardly revised to 44.7 and the EU figure improving from the preliminary estimate from 47.1 to 47.3. The US official ISM Manufacturing PMIs is 46.3 lower than the forecasted 47.5, leading the Cable up to the daily high of 1.09166.

The 4-hour chart shows that buyers are struggling to regain control. Technical indicators changed course after nearing oversold readings and currently head north above their midlines, but with limited strength. The 100 SMA maintains its bullish slope below the aforementioned daily low, while the EUR/USD pair struggles to overcome a directionless 20 SMA. If the pair breaks through the immediate resistance level of 1.0910, buyers could have better chances. The RSI sits at 63.34.

Resistance levels: 1.0910 1.0950 1.1000

Support levels: 1.0830 1.0790 1.0750

XAUUSD (4-Hour Chart)

On Monday, the price of gold initially fell to around $1,955, but later rebounded and climbed above $1,980. This was due in part to the benchmark 10-year US Treasury bond yield dropping below 3.5% following the release of a negative US ISM Manufacturing PMI report, which helped XAU/USD gather bullish momentum. However, the metal’s gains were limited by concerns that China and Brazil may drop the US Dollar for cross-border trade. At the time of writing, the price of gold was trading at $1985.30.

On the technical side, the bears for gold are hopeful due to the bearish MACD signals and the clear downside break of a two-week-old ascending trend line. The sustained trading below the 200-HMA and 100-HMA confluence also favors the bears. However, the latest recovery remains uncertain unless the quote crosses the $1,960 support-turned-resistance line. Even if it does cross this line, the HMA convergence near $1,970 poses a challenge for the XAU/USD bulls. Furthermore, a downward-sloping resistance line from March 20, currently near $1,987, restricts the short-term upside of the Gold price. RSI sits at 58.12.

Resistance: 1990, 2000

Support: 1957, 1950, 1937

Economic Data