The US dollar is making a comeback as yields begin to fly
U.S. Treasury yields extend their rebound after a poor performance in the second half of the year, accelerating the U.S. dollar higher.
Highlights:
- U.S. Treasury yields extend their rebound after a poor performance in the second half of the year, accelerating the U.S. dollar higher.
- All eyes will be on the ISM manufacturing survey and the US non-farm payrolls report later in the week.
- Ahead of the week’s high-profile events, this article focuses on the outlook for the U.S. dollar and analyzes the price action for major pairs such as EUR/USD, GBP/USD and USD/JPY.
The US dollar started 2019 on a positive note, as evidenced by the DXY index, which advanced for three sessions in a row. The 10-year Treasury yield rose 7 basis points to 3.93%. In early afternoon trading, the DXY index advanced 0.7% to 102.10, its biggest daily gain since October. This is also due to the dollar’s resilience ahead of significant events later in the week.
Economists will be looking for signs of an improving economic outlook when data such as the non-farm payrolls report and the Institute for Supply Management’s (ISM) manufacturing survey come out. As indicated in the chart below, traders are pricing in a 142 basis point reduction in interest rates over the next 12 months.
2024 Fed Funds Futures (Implied Rate by Monthly Contracts)
Source: TradingView
If employment growth and manufacturing activity unexpectedly improve, investors may start to reduce bets on deep interest rate cuts. They also expect that the Fed will be reluctant to lower borrowing costs significantly in a stable economy to avoid aggravating inflation. This would be a positive for the U.S. dollar.
If the data shows signs of weakness in the economy, it would be unsurprising for the Fed to adopt a more dovish stance, which could result in a reduction in the interest rate outlook. A NFP print below 100,000 would likely trigger this reaction.
