Investors are fixated on Treasury yields, and what is happening in the US government debt market this year is also affecting price movements in other asset classes. The impact can be said to be widespread, but Federal Reserve Chairman Jerome Powell does not consider it necessary to deal with the growth of yields. At the same time, most analysts believe that this growth in the period of low rates may lead to unpredictable consequences.
So, we are now seeing a kind of disagreement of the markets with the position of the Fed. According to traders, the American regulator should start tightening the policy earlier than the specified time, while Powell insists on his own. The rate, he said, will remain soft for many years.
The head of the Fed admitted that Treasury yields have grown significantly recently. At the same time, he made it clear that the Central Bank will act only if growth begins to be accompanied by panic and chaos in the markets. Therefore, we expect that everything will resolve by itself - or there will be panic.
And yet, the question continues to worry: who in this situation will be more right - the markets or the Fed? Will the Central Bank raise the rate in the end or not? To do this, let's turn to history.
The Central Bank is undoubtedly right, and yet the market quite often gives more accurate forecasts. For example, in 2014, Central Bank officials argued that the pace of economic growth and inflation would require aggressive policy tightening in the coming years. The opinion of traders in the fixed income securities market was in contrast. In the end, they were right, the Fed raised the rate a year later, first in 2015, and then in 2016.
Market players have learned to predict the Fed's future actions quite well, many people, including JPMorgan representatives, admit this. According to bank analysts, traders will lower their forecasts for the first Fed rate hike in the future, and this will be in line with current official estimates.
In the meantime, yields are storming highs. On Thursday, the yield level of 10-year US government bonds broke through the upper limit of the annual forecast - 1.75%. By the close of trading it rolled back, but, as everyone understands, this is temporary, the volatility will continue. While the Fed hopes that the market itself will come to balance, the dollar, taking advantage of the situation with the maximum yield of Treasuries, tends to grow.
On Friday, the dollar index is consolidating around 91.8. Statistics here also have their weight. It can be called mixed. On the one hand, the Philadelphia Federal Reserve's Manufacturing PMI showed the largest gain in the past 50 years, reaching 51.8 points from the previous 23.1 points in February. On the other hand, labor statistics pumped up. Markets, and to a greater extent the American authorities, are now concerned with employment. The weekly data on the number of initial claims for unemployment benefits rose. The indicator peaked in the last month and exceeded the consensus forecast. This, as we know, is the future data on the unemployment rate in the country.
Hence the reaction of the dollar, where on one side the growth of yields as support, and on the other - incentives to support the labor market and the economy. It is unlikely that it will be possible to keep the dollar from growing. Mass vaccinations and direct payments to the population will be the key to a solid recovery in the second quarter and, as a result, in the first half of the year.
The EUR / USD pair, after a sharp rise on Wednesday, when buyers almost pushed it to the important mark of 1.20 against the dollar, has yet to recover what it lost. The data on the German producer price index was released today. In February, the indicator climbed 1.9% on an annualized basis against a 0.9% gain in the previous month. This is slightly below the forecast. No more important indicators for Europe and the USA are expected on Friday.
Speaking about the further dynamics of EUR/USD, it should be noted that on Thursday the pair was under pressure from bears, which pushed it below 1.19 to 1.1890. Today the euro is trading slightly higher, but there are no grounds for further growth so far. In the short term, the euro may rehabilitate somewhat, but this will not be significant.
Given the recent dynamics, we should expect a further decline in the pair to the 1.1780 mark. In the meantime, 1.1830-1.1980 remains the actual trading corridor.
