Hawkish Fed Speak Drives Up US Bond Yields, DXY Soars

Michael Moran, Senior Currency Strategist at ACY

06.04.2022 05:15 pm

#stocks

Euro Plunges, AUD Reverses Gains Post RBA, USD/JPY Up

Summary: Hawkish rhetoric from Fed Presidents Brainard, Daly and George lifted US bond yields which saw the Dollar Index (DXY) soar 0.48% to 99.47 (98.90 yesterday). In late US trade, San Francisco Fed President Mary Daly said the Fed will use tools to combat inflation. Earlier in the day, Kansas City Fed head Esther George said that there was “no question that accommodative policy must be removed.” She was joined by Lael Brainard, who said that the US central bank needs to act quickly and aggressively to drive down inflation. The benchmark US 10-year treasury bond yield jumped 11 basis points to 2.55%, its highest level since early 2019. Two-year US rates climbed to 2.51% from 2.45%. Which saw the US Dollar surge 0.86% against the yield-sensitive Japanese Yen to 123.67 overnight (122.77 yesterday). The EUR/USD pair, under pressure for a week now, plunged 0.64% lower to 1.0905 (1.0977). A favoured gauge of the Greenback’s value against a basket of 6 major currencies rallied 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 provided a lift for the currency. The RBA kept its Overnight Cash Rate unchanged at 0.10%. In Asian trade, the AUD/USD pair jumped to 0.7661 overnight and June 2021 highs, before easing to settle at 0.7575 at the New York close. The Greenback finished higher against the Asian and Emerging Market currencies. The USD/THB pair (US Dollar-Thai Baht) settled 0.25% higher to 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 finished with gains. Germany’s 10-year Bund yield closed at 0.61% from 0.56%. Australia’s 10-year Treasury bond rate was last at 2.85% (2.83% yesterday).
Wall Street stocks slumped following the hawkish Fed remarks. The DOW lost 0.68% to 34,695 from 34,947 while the S&P 500 closed at 4,535, down from yesterday’s 4,590.
Data released yesterday saw Eurozone Final Services PMI climb to 55.6 from a previous 54.8, beating forecasts at 54.8. Germany’s Final Services PMI climbed to 56.1 from 55.0. France’s Industrial Production slid to -0.9% from an upward revised 1.8%, and lower than forecasts at -0.4%. UK Final Services PMI rose to 62.6 from a previous 61.0, bettering estimates at 60.9. The US Trade Deficit matched a previous -USD 89.2 billion, higher than expectations of -USD 88.5 billion. US ISM Services PMI was little changed at 58.3 against median forecasts at 58.4.

EUR/USD – the shared currency resumed its slide, plunging to an overnight and 3-week low at 1.0900 before settling to its current 1.0907 level. Better-than-forecast Eurozone and Euro area Services PMIs failed to provide support for the Euro against the broadly based firmer Greenback.
USD/JPY – the lift in US bond yields drove this currency pair to an overnight high at 123.67 before easing to close at 123.57 in New York. Yesterday, the Greenback opened at 122.77 and gradually climbed through the day.
AUD/USD – the Australian Dollar jumped in Asian trade yesterday to 0.7661 after RBA Governor Philip Lowe hinted that interest rates will be lifted as early as June. The Australian central bank left interest rates unchanged at the end of their policy meeting. Broad-based US Dollar strength pushed the AUD/USD pair back down, settling at 0.7575.
GBP/USD – the British currency was also lower against the overall higher Greenback to 1.3075 from 1.3137 yesterday. Overnight high traded for Sterling was at 1.3145. Stronger-than-forecast UK Final Services PMI in March supported the British currency.

On the Lookout: It’s all about the FOMC minutes which will be released early tomorrow morning in Sydney (4.00 am). Hawkish rhetoric from three Federal Reserve officials have boosted US bond yields and put a bid under the Greenback. Data released today started off with New Zealand’s Global Milk Price Index which fell to -1.0% from a previous -0.9%. New Zealand’s 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 Germany’s February Factory Orders (m/m f/c -0.2% from a previous 1.8% - ACY Finlogix). Germany also releases its Global Construction PMI for March (no f/c, previous was 54.9. The UK releases its Global Construction PMI for March (f/c 57.8 from 59.1 – ACY Finlogix). Eurozone February PPI follows (m/m f/c 1.3% from 5.2%; y/y f/c 31.5% from 30.6% - ACY Finlogix). Eurozone February Retail Sales is next (m/m no f/c, previous was 0.2%, y/y no forecast, previous was 7.8%). French February Retail Sales is next (m/m no f/c, previous was -0.9%). Canada starts off North America with its March IVEY PMI report (f/c 60 from a previous 60.6 – ACY Finlogix). Finally, the US Federal Reserve releases its FOMC Meeting Minutes (4 am Sydney time, 07 April).

Trading Perspective: Expect the US Dollar to maintain its broad-based strength against its Rivals. Hawkish Fed rhetoric and rising US bond yields will keep a bid under the Greenback. The only set-back to further gains is a market that gets overextended with long USD positions. There are no major US economic data releases tonight which will keep the US Dollar supported. Chances of a Fed interest rate hike in May of 50 basis points (as opposed to 0.25 bp) have increased. This saw 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. The risk though for a lower Greenback will come from the hawkish responses from other global central banks which comes from accelerating global inflation. Meantime, trading ranges with an overall bullish view on the Greenback is ideal for now.

EUR/USD – Even at current levels, the Euro still feels soft. However, caution is warranted as we approach the 1.0800 EUR/USD level, which is formidable. Overnight, the Euro traded to a low at 1.090, settling just above it to close at 1.0905. Immediate support for today lies at 1.0890 followed by 1.0870 and 1.0840. On the topside, immediate resistance is found at 1.0930, 1.0960 and 1.0990. Look for sideways trade in a likely range today of 1.0885-1.0985.
AUD/USD – The Australian Dollar lifted to an overnight high at 0.7661 which occurred following RBA Governor Philip Lowe’s hawkish remarks. Lowe hinted at a June rate hike which 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 0.7536). The next support level is found at 0.7500. On the topside, immediate resistance lies at 0.7610 followed by 0.7640 and 0.7670. Look for consolidation today in the Aussie. Likely range will be 0.7530-0.7630. Preference is to sell rallies.

(Source: Finlogix.com)

USD/JPY – The Greenback extended its advance against the Japanese Yen boosted by higher US bond yields. In contrast to the 11-point rise in the US 10-year bond rate, Japan’s 10-year JGB yield was unchanged at 0.21%. The USD/JPY pair closed at 123.57 from 122.77 yesterday. Overnight high traded 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. Look for the USD/JPY pair to stay bid, likely range today – 122.80-123.80. Trade the range.
GBP/USD – Sterling settled 0.31% lower against the Greenback to finished at 1.3075 from 1.3137 yesterday. The British Pound fell under the weight of broad-based US Dollar strength to an overnight low at 1.3067. Immediate support for today is found at 1.3065 followed by 1.3035 and 1.3005. On the topside, immediate resistance lies at 1.3100, 1.3140 and 1.3170. Overnight high traded was at 1.3167. Look for the GBP/USD pair to trade in a likely range between 1.3050-1.3150 today. Preference is to sell GBP/USD rallies.

Have a good Wednesday ahead all. Tin helmets on for tomorrow morning’s release of the FOMC minutes.

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