Yesterday the USD made a bullish reversal in the US session as Treasury yields started surging higher after the Treasury auction. The buck made some decent gains across the board and today the situation is escalating again, with EUR/USD returning back to 1.08 lows as I write.

US Treasury Yields Chart H4 – The Upside Surge Continues

This week’s surge in US Treasury yields has contributed significantly to the strength of the US dollar across various currency pairs. The reversal higher in Treasury yields, particularly the 10-year yield increasing by 7 basis points, has been a critical factor influencing currency movements. The US dollar has reached its highest points of the day against several currencies. USD/JPY reached a one-month high of 157.60, up 40 pips, reflecting the dollar’s strength.

1. Treasury Yields:
   • 10-year Treasury Yield: Increased by 7 basis points, highlighting the market’s reaction to rising interest rates.
   • 2-year and 5-year Notes: Disappointing auction results contributed to rising yields.
   • Upcoming Auction: Today’s seven-year note sale will be closely watched as a key indicator of market sentiment.
2. Market Sentiment:
   • The rise in Treasury yields indicates skepticism about the inflation narrative and expectations of persistent inflationary pressures.
   • Despite strong US economic data and hawkish Fed minutes, the dollar’s reaction to rising yields has been somewhat muted, suggesting that the market is balancing multiple factors, including potential future Fed actions and broader economic conditions.

Implications for Forex Markets

USD/JPY:

• The USD/JPY pair’s rise to a one-month high suggests strong bullish momentum for the US dollar against the yen. The 157.65 level could be a significant resistance point, with further gains dependent on continued yield increases and market risk appetite. We’re looking to buy USD/JPY on a retreat lower.

Broader Forex Market:

• Euro (EUR): Likely to face downward pressure against the USD, especially if European inflation data disappoints and ECB remains cautious.
• Pound (GBP): Could see similar trends, with the Bank of England’s policy stance and UK economic data playing crucial roles.
• Commodity Currencies (AUD, CAD): Higher US yields might weaken these currencies if risk aversion increases and commodity prices do not offer sufficient support.

Federal Reserve and Inflation:

• The Fed’s stance on interest rates will be crucial. Recent comments from Fed officials indicate a cautious approach to cutting rates, given persistent inflation.
• Market participants will closely watch upcoming US economic data, including inflation measures and employment figures, to gauge the Fed’s potential actions.

Treasury Auctions and Yield Movements:

• The outcome of today’s seven-year note auction will provide further insights into market sentiment towards US debt and inflation expectations.
• Continued monitoring of yield curves and auction results will be essential for understanding the direction of the US dollar and broader financial markets.