US Dollar Gains But US Yields, Rate Hike Odds Fall
Market minutes overview:
- The US dollar (via the DXY index) is at levels that would be its highest close for July, just days after the June US nonfarm wage report.
- Falling US Treasury yields and expectations for US rate hikes call into question the legitimacy of the strength of the US dollar.
- With the exit of the US holiday weekend and with the European football semi-finals this week, various measures of volatility continue to decline.
A mixed bag
The US yield curve flattens. US stock markets are plunging. Some agricultural products are limited. And with the US dollar (via the DXY index) at levels that would be its highest close for the month despite the USD / JPY rate cut, it seems markets are in a “risk-free” mood after the ” gold loop ”in June in the United States. report on non-farm wages and public holiday weekends in the United States.
There may be a good reason to suggest that it is the risky nature of the markets pushing the US dollar higher rather than a domestically oriented factor: the probabilities of rate hikes do not follow.
We can measure whether a rate hike is valued using Eurodollar contracts by examining the difference in borrowing costs for commercial banks over a specific time horizon. Graph 1 below shows the difference in borrowing costs – the spread – for the contracts of July 2021 and December 2023, in order to measure the direction of interest rates in the interim period between July 2021 and December 2023.
Spread of Eurodollar futures (July 2021-December 2023): daily rate chart (March to July 6, 2021) (Chart 1)
At their highest last week after the June US non-farm payroll report, there were rate hikes worth 107 basis points discounted by December 2023; now there is a price of 92 basis points. Markets take a less hawkish view of the FOMC; generally, this corresponds to the weakness of the US dollar.
Video technical notes: DXY index
- The DXY index bounces off familiar territory around the 23.6% Fibonacci retracement of the 2018 low / 2020 high range and the 38.2% Fibonacci retracement of the 2011 low / 2020 high range near 91.90. As a result, a bullish daily outer engulfing bar is forming.
- Bthe ultimate momentum is building up. The daily 5-EMA continues to serve as Support with the entire Daily EMA envelope aligned in a bullish sequential order. Daily MACD increases in bullish territory, while Daily Slow Stochastics are hold in overbought territory. He stays the case where a run to triangular resistance near 92.75 might be in the carreIt’s soon.
An interesting calendar
Out of the holiday week, and with the European football semi-finals this week (today and tomorrow), various measures of volatility continue to decline. Against this backdrop, the economic calendar appears to be an oasis this week: in what should be an otherwise calm environment, data releases offer help in the form of risk volatility events.
The minutes of the June FOMC meeting are first on the radar, followed by Chinese and Mexican inflation readings on Thursday that could spark a spark in the commodity currency complex (AUD, CAD, NZD) .
DailyFX economic calendar, “high” interest rate events, next 48 hours (Table 1)
— Written by Christopher Vecchio, CFA, Senior Currency Strategist