EUR/USD: Surging Treasury Yields and Robust US Dollar Fuel Fed Rate Hike Speculation

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Treasury Yields Ascend, Uplifting US Dollar and Aiding Fed Rate Hike Anticipation

Treasury yields have climbed across the board, with the 10-year yield scaling heights unseen since 2018. Simultaneously, the US dollar has displayed vigor against all major trading partners, save for the Japanese yen. These occurrences have stoked the belief that the Federal Reserve will persist in elevating interest rates as a countermeasure against inflation.

Rising Treasury Yields and Resilient US Dollar Reflect Investors' Confidence in Ongoing Fed Rate Increases

Ascending Treasury yields and the robust US dollar are mirroring the financial community's trust in the Federal Reserve's sustained interest rate hikes. The Fed has already implemented five rate hikes this year, with projections pointing to further increases as part of the effort to align inflation with its 2% target.

Steadfast US Economic Metrics Bolster Fed's Position

The Federal Reserve's stance garners reinforcement from unwavering US economic data, featuring persistent inflation and stable jobless claims. The labor market's tenacity additionally buttresses the Fed's commitment to a "higher for longer" approach to interest rates.

Market Reaction and Ongoing Dollar Strength

The market has responded to elevated inflation and claims data by divesting from equities and seeking refuge in safe-haven assets, including Treasuries, the US dollar, and mega-cap tech and oil stocks. As long as there remains uncertainty regarding the Fed's forthcoming rate decisions, the US dollar is expected to maintain its robustness.

Technical Analysis

The EUR/USD currency pair has experienced a rebound from a support level and is gravitating toward a resistance level around 1.0670, coinciding with the upper boundary of a descending channel. The breakout from the rising wedge, prompted by CPI data, has necessitated vigilance for a pullback to approximately 1.05600, where a short position might be considered with a target near 1.035000.

Increasing Treasury yields and a formidable US dollar are heightening expectations of continued interest rate hikes by the Federal Reserve. This could exert further downward pressure on the stock market and fortify the US dollar's position. Investors are advised to closely monitor the Fed's forthcoming meeting for insights into its prospective rate hike strategy.

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Last updated: 11/07/2023 10:56

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