Fed hawkish rhetoric pushes US bond yields higher, US dollar index soars

Summary: Hawkish rhetoric from Fed Chairs Brainard, Daly and George sent US bond yields higher as the Dollar Index (DXY) climbed 0.48% to 99.47 (98.90 yesterday). At the end of US trade, San Francisco Fed President Mary Daly said the Fed would use tools to fight inflation. Earlier in the day, Kansas City Fed Director Esther George said there was “no question that the dovish policy needs to be removed.” She was joined by Lael Brainard, who said the US central bank must act quickly and aggressively to bring down inflation. The yield on benchmark 10-year US Treasury bonds jumped 11 basis points to 2.55%, its highest level since the start of 2019. US two-year rates climbed to 2.51%, against 2.45%. Which saw the US Dollar jump 0.86% against the yield-sensitive Japanese Yen to 123.67 overnight (122.77 yesterday). EUR/USD, under pressure for a week now, plunged 0.64% to 1.0905 (1.0977). A preferred gauge of the greenback’s value against a basket of 6 major currencies rose 0.48% to 99.47 from 98.90 yesterday. Earlier in the day, Reserve Bank of Australia Governor Philip Lowe hinted at an interest rate hike as early as June, which gave the currency a boost. The RBA kept its Overnight Cash Rate unchanged at 0.10%. In Asian trading, the AUD/USD pair surged to 0.7661 overnight and to June 2021 highs, before easing to settle at 0.7575 at the New York close. The greenback finished higher against Asian and emerging market currencies. USD/THB (US Dollar-Thai Baht) was up 0.25% at 33.52 (33.40). Against the offshore Chinese yuan, the greenback (USD/CNH) was last at 6.3785 (6.3645 yesterday).
Other global bond yields ended with gains. The yield on the German 10-year Bund closed at 0.61% versus 0.56%. The Australian 10-year Treasury rate was last at 2.85% (2.83% yesterday).
Wall Street stocks tumbled on hawkish remarks from the Fed. The DOW lost 0.68% to 34,695 from 34,947 while the S&P 500 closed at 4,535, down from 4,590 yesterday.
Data released yesterday saw the Eurozone Final Services PMI climb to 55.6 from 54.8 previously, beating forecasts at 54.8. Germany’s final services PMI rose from 55.0 to 56.1. France’s industrial production slipped to -0.9% from an upward revision of 1.8%, and below forecast at -0.4%. The UK Final Services PMI rose to 62.6 from 61.0 previously, beating estimates at 60.9. The US trade deficit was at a previous -$89.2 billion, better than expected -$88.5 billion. The US ISM services PMI was little changed at 58.3 versus a median forecast of 58.4.

  • EUR/USD – The common currency resumed its slide, plunging to an overnight and 3-week low at 1.0900 before stabilizing at its current level of 1.0907. The better-than-expected Eurozone and Eurozone Services PMIs did not support the euro against the firmer, broad-based greenback.

  • USD/JPY – Rising US bond yields took this currency pair to an overnight high at 123.67 before falling back to close at 123.57 in New York. Yesterday, the greenback opened at 122.77 and steadily climbed throughout the day.

  • AUD/USD – The Australian dollar jumped in Asian trade yesterday to 0.7661 after RBA Governor Philip Lowe hinted that interest rates would be raised as early as June. Australia’s central bank left interest rates unchanged at the end of its policy meeting. Broad-based strength in the US Dollar sent the AUD/USD pair lower, settling at 0.7575.

  • GBP/USD – The British currency was also weaker against the broadly higher greenback at 1.3075 from 1.3137 yesterday. The overnight high traded against the British pound was 1.3145. The stronger than expected UK Final Services PMI in March supported the UK currency.

On the lookout: This is the FOMC Minutes which will be released early tomorrow morning in Sydney (04:00). Warmongering rhetoric from three Federal Reserve officials pushed US bond yields higher and put a bid under the greenback. Data released today began with New Zealand’s Global Dairy Price Index falling to -1.0% from -0.9% previously. New Zealand ANZ Bank commodity prices (no f/c, previous was 3.9% – Forex Factory). China follows with its Caixin Services PMI for March (f/c 49.6 from 50.2 – FX Factory). Europe kicks off with factory orders from Germany in February (m/mf/c -0.2% vs. 1.8% – ACY Finlogix). Germany also releases its Global Construction PMI for March (no f/c, previous was 54.9. UK releases its Global Construction PMI for March (f/c 57.8 from Eurozone February PPI follows (m/mf/c 1.3% from 5.2%; y/yf/c 31.5% from 30, 6% – ACY Finlogix) France February retail sales are as follows (m/m w/o f/c, previous was -0.9%) Canada starts with North America with its report IVEY March PMI (f/c 60 vs a previous 60.6 – ACY Finlogix) Finally, the US Federal Reserve releases its FOMC meeting minutes (4am Sydney time, 07 April ).

Business outlook: Expect the US Dollar to maintain its broad-based strength against its rivals. The Fed’s hawkish rhetoric and rising US bond yields will keep the supply under the greenback. The only setback to further gains is a market getting too wide with long USD positions. There are no major US economic data releases tonight that will keep the US Dollar supported. The odds of a May Fed interest rate hike of 50bps (vs. 0.25bps) have increased. This has seen US bond yields climb. The Dollar Index (DXY) closed at 99.47, its highest since May 2020. The next big resistance for the DXY is at the 100.00 level. However, the risk of a weaker greenback will come from hawkish responses from other global central banks stemming from accelerating global inflation. In the meantime, trading ranges with an overall bullish view on the greenback are ideal for now.

EUR/USD – Even at current levels, the euro still looks soft. However, caution is called for when approaching the level of 1.0800 EUR/USD, which is formidable. Overnight, the Euro traded as low as 1.090, settling just above to close at 1.0905. Immediate support for today is at 1.0890 followed by 1.0870 and 1.0840. On the upside, immediate resistance lies at 1.0930, 1.0960 and 1.0990. Look for sideways trades within a likely range today of 1.0885-1.0985.

AUD/USD – The Aussie dollar hit an overnight high of 0.7661, which came on the heels of hawkish remarks by RBA Governor Philip Lowe. Lowe hinted at a June rate hike that provided overall support for the Aussie Battler. The AUD/USD pair closed at 0.7575, down 0.4% from yesterday. For today, immediate support can be found at 0.7535 (overnight low at 0.7536). The next level of support is found at 0.7500. On the upside, immediate resistance is at 0.7610 followed by 0.7640 and 0.7670. Expect consolidation today in the Aussie. The likely range will be 0.7530 to 0.7630. The preference is to sell rallies.

(Source: Finlogix.com)

USD/JPY – The greenback extended its lead against the Japanese yen, boosted by rising US bond yields. Unlike the 11 bp rise in the US 10-year bond yield, the Japanese 10-year JGB yield was unchanged at 0.21%. USD/JPY closed at 123.57 from 122.77 yesterday. The overnight high was at 123.67. Immediate resistance is found at 124.00 followed by 124.30. Immediate support can be found at 123.20 and 122.90. Expect USD/JPY to remain bullish, likely range today – 122.80-123.80. Negotiate the range.

GBP/USD – The British pound settled down 0.31% against the greenback to end at 1.3075 from 1.3137 yesterday. The British pound fell under the weight of widespread US dollar strength to hit an overnight low of 1.3067. Immediate support for today is at 1.3065 followed by 1.3035 and 1.3005. On the upside, immediate resistance is at 1.3100, 1.3140 and 1.3170. The overnight high was at 1.3167. Expect GBP/USD to trade in a likely range between 1.3050 and 1.3150 today. The preference is to sell GBP/USD rallies.

Happy Wednesday everyone. Sheet metal helmets for tomorrow morning’s publication of the FOMC minutes.

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