The market is now caught in a push and pull on the reflation narrative

Author: Justin Low | Category: News

Does the early reflation narrative have more legs to run to start the year?

The Georgia runoffs, Fed talk, and Biden's stimulus plan were key components to get the market hyped up about the reflation narrative to start the new year but have we finally run out of fuel on that front - at least for now?

That is the key question the market will have to answer in the coming days.

With the long weekend in the US, the market saw scope for a bit of a pause towards the end of last week with yields retreating - also on a 'sell the fact' play on Biden - while equities also took a bit of a breather after hitting all-time highs.

10-year Treasury yields are higher on the day but sitting around 1.10%, nothing too jumpy. Meanwhile, US futures are pointing towards a more positive open but that could owe to a return of positioning after the long weekend and profit-taking.

The key question above is hanging over the heads of investors at the moment as we get the new week started. And that will arguably provide the necessary impetus for the next directional trade in the market in the near-term.

It is not going to be an easy one to answer but there are signs in which we can look out for to provide some clue about how the market is "feeling".

The bond market is the obvious one and while a retreat back under 1% for 10-year yields seems unlikely, the lack of an extensive breakout to the topside above 1.20% will also keep a lid on the hype surrounding the reflation narrative for now.

This could be the market hinting that we could be due for some consolidation, although equities can still take comfort in the Fed continuing to keep the printing press running.

What about the US dollar?

The dollar has had a mixed reaction all things considered, as it slumped in the opening part of the year before finding steadier footing in recent days.

That said, the greenback looks to be on the back foot again now as EUR/USD bounces off key support yesterday to move back above 1.2100. However, near-term resistance is keeping a lid on gains so far on the session ahead of Yellen's testimony.

Meanwhile, USD/JPY also is reflecting a similar pause as is the case in yields with key resistance trendlines above 104.00 capping any recent upside momentum.

While the dollar has shown some resilience recently, there are still plenty of question marks surrounding its status in the bigger picture of things.

I'd still argue that on the balance of things, the path of least resistance remains for a move lower with the Fed put being the key driver of the market.

And if the greenback will not be getting a tailwind from higher yields in the near-term, then there is the potential to retest key technical levels moving forward.

But baby steps.. First, we have to get through Yellen today and we also have to read the tea leaves on the charts to be more certain about market sentiment.

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