Market News
Breakouts on US yields have changed the USD outlook
Treasury yields have surged, breaking key levels and driving a significant shift in the USD outlook. Yield differentials are pulling major forex pairs like EUR/USD and USD/JPY, while the Dollar Index has decisively reversed its bear trend, signaling a medium-term range trade.
Breakouts on US Yields Have Changed the USD Outlook
Recent shifts in Treasury yields have transformed the USD’s trajectory. After months of bearish trends, the dollar has reversed as yield differentials fuel a USD rally, altering the medium-term outlook.
Key Developments:
• Treasury yields break critical levels for 2s and 10s.
• Yield differentials drive USD moves against major forex pairs.
• The Dollar Index breaks resistance, signaling a trend reversal.
Upside Breaks on Treasury Yields
Treasury yields have consistently risen since the latest Fed meeting. While the Fed raised rates by 25 basis points, leaving the door open for more hikes, robust Nonfarm Payrolls and persistently high inflation have pushed yields higher. Fed hawks, such as James Bullard, have called for additional rate hikes, while debt ceiling concerns have done little to deter the rally.
• 10-Year Treasury Yield: The break above 3.64% signals a decisive shift.
• 2-Year Treasury Yield: The move above 4.25% marks a breakout from an 8-month pivot range, reflecting expectations for another Fed rate hike in upcoming meetings.
Shifting Market Expectations:
Markets are now pricing in an 80% probability of at least one rate hike, with rate cuts being delayed well into 2024.
Yield Differentials Drive Forex Moves
Rising US Treasury yields relative to other major government bonds are influencing forex markets:
• EUR/USD: Falling US-German 2-year yield spreads are dragging the pair lower.
• USD/JPY: A sharp rise in US-Japan 2-year yield spreads is pushing the pair higher.
Dollar Index Signals a Reversal
The Dollar Index has broken a key downtrend in place since October. The move above the 102.80/103.45 resistance band now targets the 105.88 high.
Key Takeaways:
The USD outlook has decisively shifted from a bearish trend to a medium-term range trade, with focus on yield-driven support and resistance levels. Traders should monitor yield differentials closely, as they remain a key driver of USD strength.
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