US Dollar extends gains as 10-year Treasury yields rise to four year high

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24 April 2018

thomasdodds

A march higher in US Treasury yields continued to provide good support for the US Dollar yesterday, recommencing of a traditional relationship that has been lacking in recent months.

T
he greenback was sent around half a percent higher against both the Pound and the Euro on Monday as US 10 year Treasury yields fell just short of breaching the psychological 3.0% level. This extends its climb to around 25 basis points in the past three weeks alone, as a sharp upward move in oil prices increased the likelihood of higher inflation and the market continued to ramp up bets for at least three interest rate hikes from the Federal Reserve this year.

A recent subside in geopolitical concerns in the Korean peninsula allowed investors to focus on macroeconomic fundamentals, which remain broadly impressive in the US and conducive of higher interest rates. Yesterday’s PMI data was fairly encouraging, suggesting that the world’s largest economy got off to a good start in the second quarter of the year. Markit’s business activity services index rose to 54.4 in April versus the 54.0 consensus, while the manufacturing index also jumped to 56.5 according to the preliminary estimate, its highest level since 2014.

Euro slips to near two month low ahead of ECB meeting

A welcome upward revision to the Eurozone PMI data yesterday morning wasn’t enough to prevent the Euro from crashing to its lowest level since the first week of March. While the data beat expectations, it remains comfortably shy of January’s multi-year highs, suggesting that the Euro-area economy could be on course to slowing down in the first half of 2018.

All eyes will be on Thursday’s meeting of the European Central Bank. As we outlined in the ECB preview report, no change in the bank’s forward guidance is expected and President Mario Draghi is likely to maintain his dovish rhetoric suggesting that any hike in interest rates is still a long way off.

Bank of England rate hike doubts keeps Sterling on back foot

Sterling extended its run of losses to five straight London trading sessions on Monday, its longest run of declines in over a year. A broadly stronger greenback and growing doubts over a Bank of England rate hike in May sent the currency slumping below the 1.40 level for the first time in over two weeks and to its lowest level since mid-March.

Last week’s soft wage growth, inflation and retail sales data, followed by some dovish comments from BoE Governor Carney, has thrown a rate hike in May into serious question. While we think a hike is still on the cards next month, it is likely to be a close call with a number of dissenters on the MPC voting in favour of no change in policy.