The US dollar came under pressure on Wednesday, after the markets calmed down following the results of the Fed meeting and the resumption of the demand for risky assets. The following day, the situation in the US government debt market made its adjustments.
It appeared that investors in US government bonds were panicking yesterday. This was reflected in the resumption of sales of these securities, which caused a strong increase in yields. So, the yield of the benchmark 10-year treasuries showed an increase of over 6% and a high of 1.754%, which already surpassed the pre-pandemic yield of these assets. Thus, there is no doubt that being the most influential segment in the currency market, the government debt market has had a strong impact on other segments as well. In particular, the stock markets and commodity market assets were significantly affected, and the US dollar received significant support in the currency market.
What caused such dynamics of the US Treasury market?
In fact, the Fed and personally its Chairman, J. Powell did everything at the end of the meeting, clearly stating that the regulator will maintain its monetary rate until 2023, which inspired investors on Wednesday. However, investors in the government securities market got nervous, reasonably believing that a sharp inflation growth amid a super-soft monetary exchange rate and all kinds of stimulus and support measures, would result in an increase in market rates. In turn, this will make a lot of investors want to start abandoning non-interest-bearing Treasuries.
In case that sell-off continues, an increase in interest rates in the debt market will lead to the same sales in the stock markets with a simultaneous growth in demand for the US dollar. This is the reason why we saw such an illustration on Thursday.
Now, let's try to determine what to expect today and possibly, next week. In our opinion, investors' attention will continue to focus on the dynamics of Treasury yields. This morning, the 10-year yield made a downward correction from 1.79% to 1.698%. If this decline continues, it is very possible that it will lead to an increase in investor activity in the markets, to an increase in stock indices in Europe, and then in the US. On the other hand, the dollar will be under pressure, and the quotes for crude oil prices will rise. This is the most acceptable scenario for the markets. But it looks like there is another generally positive scenario. If the yield of treasuries stabilizes at approximately current levels, this will also support the demand for risky assets, oil and push down the dollar. But if the sell-off resumes, it will definitely support the dollar, while stock indexes and commodity prices will decline again.
From our viewpoint, it is better to follow the second scenario – the stabilization of Treasury yields, which indicates the continuation of moderate optimism in the markets. Such dynamics are possible for today and may extend next week.
Forecast of the day:
The EUR/USD pair found support at the level of 1.1900. If the market sentiment improves and the Treasury yields continue its correction, the pair will most likely rebound to the level of 1.2035.
Gold's price may also receive support on the wave of the Treasury correction. If the price consolidates above the level of 1739.00, further growth will continue to 1770.00.
