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Dynamics of the yield of US Treasuries drives the markets

Relevance up to 07:00 2022-01-20 UTC+00

The topic of a possibly earlier Fed rate hike has surprised financial markets, causing a sharp drop in global stock indices, which supported the growth of the US dollar amid the rising yield of the US Treasuries.

The Fed’s monetary policy meeting will be held next week. Many in the market believe that it could result in the actual announcement of the date for the first interest rate hike as early as the March meeting. These sentiments caused a new wave of sales in the US government debt market, which caused a sharp rise in the yield of these securities on Tuesday. Here, the yield of the 10-year Treasury benchmark surged to the level of early January 2020, actually recouping all the fall that took place during the COVID-19 pandemic.

These sell-offs hit hard not only the US stock market but also the European and Asia-Pacific markets. Observing everything that is happening, we can say that investors are playing back the high probability of the Fed’s decision on the timing of raising rates. But if next week, the Central Bank and J. Powell personally express hope that the slowdown in inflation may continue, this will lead to the opposite effect – an upward pullback in stock indices, an increase in demand for Treasuries, which will lead to a decrease in profitability and, as a result, to the weakening of the US dollar.

In general, yesterday’s dynamics of the ICE dollar index is interesting, which has risen sharply, but still remains below the key level of 96.00 points. Its breakdown can open the way for it to the level of 97.00 points.

Judging by the dynamics of the futures for major European and US stock indices, the sell-off in the stock markets is likely to resume. The movement of Treasury yields can serve as an important signal again. Before the opening of European trading, 2-year notes that are sensitive to changes in rates are showing an almost vertical increase in yield. Ten-year notes also try to keep up with them. Earlier, the benchmark’s yield is growing by 0.88%, that is, to 1.884%.

What can be expected today in the currency market?

We believe that if the yields of the US Treasuries do not correct downwards, this will lead to an increase in the ICE dollar index against almost all currencies, except for the yen, which is perceived as a safe-haven currency. Therefore, it is necessary to closely monitor the dynamics of the yield of US government bonds.

At the same time, if the sale of Treasuries stops or even some purchases begin maybe amid investors’ decision that the topic of raising rates in March has already been recovered, we should expect the US dollar to weaken against all currencies except for the yen. It will also be possible to observe the upward pullback of stock indices.

Forecast of the day:

The EUR/USD pair found support at the level of 1.1320. If it holds above it, and the mood in the market improves slightly, then the pair may make an upward pullback to the level of 1.1385.

The USD/JPY pair stopped at the level of 114.25. Like the EUR/USD pair, it may react to the improvement in the market mood by recovering to the level of 115.00.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

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