US Dollar recovers on rising bond yields, Fed rate hike chances

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10 May 2017

thomasdodds

The US Dollar continued to recover ground on Tuesday, rallying to a three week high against its major peers on rising US bond yields and focus shifting back to the diverging monetary policy stances across the Atlantic.

S
unday’s resounding victory for Macron at the French Election has temporarily taken attention away from politics and back onto central bank policy. Financial markets remain generally optimistic about the health of the US economy. Recent hawkish comments from Federal Reserve officials in the past few days have continued to ramp up expectations that the central bank will raise interest rates again next month. This growing optimism has been reflected in the Dollar index, which rose to its highest level since mid-April, reaching an eight week high against the Yen. The S&P 500 has also increased to record levels, while US bond yields continued to march higher.

“Super Thursday” remained the hot topic in the UK yesterday in the absence of any major market moving information. The Bank of England will be announcing its monetary policy decision and releasing its quarterly inflation report on Thursday, an event which could potentially test Sterling’s psychological 1.30 level against the US Dollar. Governor of the Bank of England Mark Carney will be releasing updated growth and inflation forecasts, while traders have been speculating that one of the more hawkish members of the MPC might join Kristin Forbes in voting for higher interest rates.

Activity should begin picking up pace today following yesterday’s fairly quiet session. President of the ECB Mario Draghi will be speaking at midday in the Netherlands, with a decent chance he could touch on monetary policy.

Major currencies in detail

GBP

The Pound was fairly range bound on Tuesday, steadying near its seven month high against the US Dollar on growing optimism that Theresa May’s government will gain a stronger control over parliament following next month’s election.

Today will be another especially quiet day ahead of tomorrow’s Bank of England announcement. The latest market pricing is continuing to suggest that a tightening in monetary policy from the BoE may not take place until 2019. We think that this is far too conservative, and a hawkish assessment from the central bank on Thursday could support this view.

EUR

The single currency continued to slide against the Dollar yesterday, having now given up almost 1.5% since Macron was voted in as the next French President on Sunday.

With political uncertainty temporarily put on the back burner in Europe, the Euro is likely to be driven more by the US Dollar than anything else. Traders completely overlooked yesterday’s industrial production numbers out of Germany which were, on the whole, better-than-expected.

Draghi will be the main draw today when he speaks at midday. Other than that, no significant economic announcements of note, barring second tier data in France.

USD

US benchmark 10 year Treasury yields rose to a five week high on Tuesday, pushing to greenback to its highest level in three weeks. With Donald Trump’s plans to ramp up spending and cut taxes not yet in full flow, the prospect of higher interest rates remains the main driver for the Dollar. As we approach the June meeting, investors are growing increasingly confident that the Fed will hike again next month. We see it almost entirely assured.

Dollar traders will look to Friday’s retail sales and inflation news, with no significant data set for release today. Federal Reserve member Rosengren could shift the Dollar when he speaks this afternoon.