US 2-Year Bond Yield Soars; Powell Ready to Lift Rates Quicker

Dollar Index Rockets to 2023 Peak; AUD, EMFX, Stocks Tumble

Summary:

The Dollar Index (DXY), a popular measure of the Greenback’s value against a basket of 6 major currencies, rocketed 1.2% higher to 105.22, matching a 2023 peak.

The 2-year US Treasury bond yield soared a whopping 14 basis-points to 5.0% (4.86%). In his testimony to the US Congress, Fed Chair Jerome Powell said that the Fed is likely to hike interest rates higher and potentially quicker than previously anticipated.

Inflationary pressures remain elevated after US economic data have come in stronger than anticipate. While Powell remarked that the process of getting inflation back down to 2% has a long way to go, even if it is moderating.

The Australian Dollar (AUD/USD) plummeted 2.1% lower to 0.6590 from 0.6710 after the RBA increased its Overnight Cash Rate by 25 bps to 3.6%, which was widely expected. RBA Governor Philip Lowe said that the current episode of high inflation is only temporary.

The Greenback’s rally was broad-based. The Euro (EUR/USD) tumbled 1.25% to 1.0550 from 1.0640 yesterday. Sterling (GBP/USD) plunged to 1.1830 from 1.2040 yesterday.

Against the Japanese Yen, (USD/JPY) the US Dollar climbed 0.82% to 137.10 from 135.70. The US Dollar jumped higher against the Asian and Emerging Market currencies. The USD/CNH pair (Dollar-Offshore Chinese Yuan) rose 0.65% to 6.9930 (6.9000). USD/THB rallied 1.7% to 35.08 (34.57).

Wall Street stocks slumped. The DOW fell 1.55% to 32,892 (33,400) while the S&P 500 dropped 1.43% to 3,990 (4,047). Other global share indexes settled lower.

Economic data released yesterday saw Australia’s Retail Sales match forecasts, at +1.9%. Australia’s Trade Surplus eased to +AUD 11.69 billion from a previous upward revised +AUD 12.9 billion.

China’s Trade Surplus soared to +CNY 810 billion, beating median expectations at +CNY 572 billion and a previous +CNY 550 billion. Switzerland’s Unemployment Rate was unchanged at 1.9%.

The UK Halifax House Price Index (m/m) rose to 1.1% from a previous upward revised 0.2%, bettering estimates at -0.3%.

• AUD/USD – The Aussie Battler quickly reversed its rally at the start of this week, plummeting 2.1% down to 0.6590 after the RBA hiked rates but paved the way for a forthcoming pause in policy moves. In volatile trade, the overnight high recorded was at 0.6748. The Aussie Battler tumbled to an overnight low at 0.6581 before settling.
• EUR/USD – The shared currency slid 1.25% to 1.0550 against 1.0640 yesterday. Broad-based US Dollar strength and lower than expected Eurozone Consumer Inflation Expectations weighed on the Euro. Overnight low traded was at 1.0546 while the high recorded was at 1.0694 in choppy trade.
• USD/JPY – The Dollar rebounded against the Japanese Yen boosted by higher US yields. The 10-year US bond rate was up 1 basis point to 3.96% while Japan’s JGB yield was unchanged at 0.50%. Overnight high traded for USD/JPY was at 137.17 while the overnight low recorded was at 135.54. Like the rest of FX, trade was volatile in this currency pair.
• GBP/USD – Sterling slumped against the Greenback to 1.1835 from 1.2050 yesterday. Broad-based US Dollar strength following Powell’s testimony weighed on the British Pound. Trade was volatile with the overnight low recorded at 1.1822 while the overnight high recorded was at 1.2065.

On the Lookout:

As we come to mid-week the economic calendar starts off with Japan’s Annual Bank Lending report (y/y f/c 2.9% from a previous 3.1% - ACY Finlogix), Japanese January Current Account (f/c -JPY 818.4 billion from a previous +JPY 33.4 billion). RBA Governor Philip Low speaks at the Australian Financial Review Business Summit in Sydney (8.55 am Sydney). Later in the day, Japan releases its Economy Watchers Sentiment (f/c 48.3 from 48.5 – FX Street) and Japanese Leading Indicators (f/c 97.1 from 97.2 – FX Street). Germany starts off Europe with its January Industrial Production (m/m f/c 1.4% from -3.1%; y/y f/c -6.1% from -6.4% - ACY Finlogix). Italy follows with its January Retail Sales (m/m f/c -0.4% from -0.2%; y/y f/c 2.3% from 3.4%). The US starts off North America with its February ADP Employment Change (f/c 200K from a previous 106K – ACY Finlogix). Watch this set of data, anything outside forecasts could be market moving.

Next up is the US Merchandise Trade Balance for January (f/c -USD 68.9 billion from -USD 67.4 billion – ACY Finlogix), US January JOLTS Job Openings (f/c 10.5 million from 11.012 million – ACY Finlogix). The Bank of Canada (BOC) is expected to maintain its Overnight Rate at 4.5%. A BOC press conference follows. US Fed Chair Jerome Powell testifies before the House Financial Services Committee in Washington DC.

Trading Perspective:

Another busy and potentially volatile day ahead for FX. The highlight will be Fed Chair Jerome Powell’s testimony before the US House Financial Services Committee. Powell has reiterated that it will take awhile to get inflation down, which points to higher rates quicker than expected. Today’s data releases will be scrutinised and any large discrepancies from what’s expected will move currencies. Get ready for another riveting day in the world of FX.

• AUD/USD – The Aussie Battler was pummelled lower against the overall stronger Greenback and risk-off sentiment. At the close of trade in New York, the AUD/USD pair was trading at 0.6590 from 0.6710 yesterday. On the day, look for immediate support in the AUD/USD pair at 0.6580 to hold off initial sellers. The next support level lies at 0.6550 and 0.6520. On the topside, look for immediate resistance at 0.6620, 0.6650 and 0.6700 to cap. Look for another choppy day in the Aussie, likely range 0.6570-0.6720. Trade the range. Prefer to buy dips.
• EUR/USD – The shared currency slumped against the US Dollar to finish at 1.0555 against yesterday’s 1.0640. On the day look for immediate support at 1.0520 and 1.0490 to hold. Immediate resistance can be found at 1.0580, 1.0610 and 1.0640. Look for further choppy trade in a likely range today of 1.0530-1.0680. Trade the range but prefer to sell rallies.
• GBP/USD – Sterling slid under the weight of broad-based US Dollar strength to finish 1.6% lower to 1.1830 from 1.2040 yesterday. Look for immediate support at 1.1820 (overnight low traded was 1.1821) to hold. The next support level lies at 1.1790 and 1.1760. Immediate resistance can be found at 1.1870, 1.1920 and 1.1970. Look for another volatile ride in the British currency, likely range today of 1.1800-1.2000. Trade the range.
• USD/JPY – Against the Japanese Yen, the US Dollar rallied to finish 0.82% higher at 137.10 against yesterday’s 135.70. On the day, look for immediate resistance at 137.20 to cap. The overnight high recorded was at 137.17. The next resistance level lies at 137.50 followed by 137.80. On the downside look for immediate support at 136.80, 136.50 and 136.20. Expect another choppy trading day in this currency pair, likely range 135.80-137.30.

Happy Wednesday and trading all.

This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.