US Dollar extends rally as bond yield spreads widen to multi-decade high

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18 May 2018

thomasdodds

The major currencies spent much of London trading on Thursday fairly range bound, largely due to a lack of any significant market moving news.

W
ith no significant data releases yesterday, much of the attention among currency traders was again on US bond yields. US Treasury yields continued to march higher following the impressive US economic performance and expectations for higher interest rates. The 10-year yield is currently above 3.1%, having increased by almost 0.4% since mid-April alone. This is its highest level since 2011, meaning that the spread between the US 10-year and German equivalent is now at its widest in almost 30 years. This widening in rate differentials is large contributor to the Dollar’s recent surge, rising to its strongest position since December 2017.

Macroeconomic news out of the major economies on Thursday was largely immaterial, and the market was little moved as a result. Eurozone construction output was soft, contracting again in March for the third straight month. US jobless claims missed expectations, although still came in at a healthy 222,000. The speech from notoriously dovish Federal Reserve member Kashkari, failed to touch on monetary policy.

Activity could pick up pace today, although all signs suggest a relatively quiet end to the week. This morning’s trade balance data could shift the common currency, while a number of Federal Reserve speeches could impact the US Dollar, should they touch on monetary policy.

Pound retraces gains after May denies customs union policy

Sterling had a similarly quiet trading session yesterday, edging modestly lower for the day. The currency rallied during Asian trading hours, on news that Britain would tell Brussels it was ready to stay in the customs union beyond the Brexit transitional arrangement, although this was later denied by Theresa May. While the move in the currency proved temporary, it highlighted the acute sensitivity the Pound has to any and every headline out of the Brexit negotiations.

In the absence of any macroeconomic news out of the UK today, we instead look towards next Wednesday’s inflation data, which could be a key test for Sterling. As we have mentioned in the past few days, economic news has taken on added importance in the UK, following the Bank of England’s latest policy meeting suggesting it would only raise interest rates again should data show a marked pick-up. This afternoon’s speech from Bank of England member, Andy Haldane, is not expected to be a particularly significant market mover.