As demand for dollars rose amid mounting expectations for interest rate increases in the United States on Wednesday, the greenback held firm against the euro after US yields rose sharply the previous day.
On Tuesday, the euro fell about 0.7%, its biggest daily drop in a month, hitting its 50-day moving average at $1.1327.
Sterling also held below its 200-day moving average ahead of British inflation figures due later Wednesday, as speculation arose about an assault on Boris Johnson’s leadership.
Currently, the US Dollar Index (DXY) is bouncing off a level that in March 2020 was deemed important. There have been two instances since the start of the pandemic when the low (94.67) was in play, the latest one occurring around the October peak.
In the short-term, it’s unclear whether the rise out of the May low is merely a bounce or the beginning of a new uptrend.
Despite recent weakness, the trendline from that low is being pushed back above. It is possible that the upward trend could resume if broken trend support is fully reclaimed, but confidence in that outcome remains low.
Currently, the DXY is facing difficulties overcoming the resistance of the range that developed from late November to last week. If the index is to continue climbing, the short-term ceiling may be around 95.55.
An almost decade-high annual headline inflation rate is projected in Britain, and a surprise could trigger more bets on rate hikes and renew the pound’s rally.
As both U.S. Treasury yields and traders are beginning to fear another hawkish Fed policy decision next week, the dollar has been boosted.
Based on (Tuesday’s) price action, there is slightly more than one hike priced in for the March meeting, and I think it will oscillate between 25-50 basis points by next week.
Treasury yields on two-year notes have jumped 15 basis points over the past two sessions to cross 1%, while benchmark 10-year yields hit a new two-year high of 1.9% on Wednesday.
Three more hikes will occur in 2022, based on Fed funds futures. In the event traders start expecting not just a faster but a further rise in interest rates, dollar strength could extend.
A rethink of U.S. interest rates – evident by the recent increase in yields – is likely to support the dollar in the first half of the year, rather than just a faster pace of increases initially.
On Wednesday, equity investors were unsettled by changes in the U.S. bond market, which led to a slight rise in the safe-haven yen to 114.41 to the dollar.
The dollar index traded at 95.676, retaining most of its 0.5% gain.
A delicate situation in Ukraine also kept traders on edge. As part of this week’s meeting with the Russian foreign minister in Geneva, U.S. State Secretary Antony Blinken will seek to defuse the crisis with Moscow.