Forex Trading Alert: The U.S. Dollar Rises in Volatile Trading, 10-Year Treasury Yield Breaks 2%

The dollar rose slightly on Thursday (Feb. 10), and the U.S. Department of Labor said the January CPI rose 0.6 percent from the previous month and jumped 7.5 percent from the same period a year earlier, the biggest year-over-year increase since February 1982. It was the fourth consecutive month in which the CPI rose more than 6 percent year-over-year and made St. Louis Fed President Bullard "noticeably" more hawkish.

The dollar index initially rose nearly 0.5 percent, then plunged 0.4 percent, closing up 0.15 percent to 95.68; a bearish retracement of the dollar followed The Fed Bullard called for a full percentage point rate hike by July. Consumer inflation data from the U.S. was higher than expected, with the dollar index falling to a near three-week low after the data was released, reversing previous gains.

Bipan Rai, head of foreign exchange strategy at Capital Markets of The Canadian Imperial Bank, said rate hikes usually boost the dollar, but the market has gone long enough. The market actively profited from those existing dollar long positions, and the market very aggressively digested not only the Fed's expectations for this year, but also next year.'

The current possibility of a 50 basis point hike for March has exceeded the previously expected 25 basis points. The market also assessed how other central banks would respond to rising inflation around the world, which was particularly fueled by higher commodity prices.

Edward Moya, senior market analyst at OANDA, said this broader price pressure is a global theme, and we are starting to see many other advanced economies becoming more aggressive in dealing with inflation.

After the release of the US CPI data, US Treasury yields, especially short-term bond rates, rose sharply. The two-year Treasury yield, which typically reflects interest rate expectations, jumped 26.1 basis points to 1.609%. The 10-year Treasury yield broke through 2 percent for the first time in two and a half years.

Nancy Davis, managing partner and chief investment officer at Quadratic Capital Management LLC, said the interest rate market was questioning the extent of inflation. I don't think the CPI shows us the whole picture. Given the Fed's forward guidance, the interest rate market is expected to slow down in absorbing inflation.

The eurusd rose 0.03% to 1.1428, having previously fallen 0.4% and also rose 0.6% at one point; earlier, the euro weakened due to the impact of short liquidations in the us dollar, but buying by real money investors helped slow the fall of the euro; and the euro reversed the decline against the dollar as the dollar generally weakened. EUR/SEK climbed to an intraday high of 10.5049 after the Riksbank maintained a dovish monetary policy stance.

Philip Lane, chief economist at the ECB, defended his views. While other policymakers have become more hawkish, he believes that the eurozone's record inflation rate will also slow without more aggressive action.

Usd/JPY rose 0.42 percent to 116.01, previously driven by momentum buying, rising 0.7 percent to 116.34, near its highest since January 2017; the Bank of Japan said on Thursday it would buy 10-year treasuries indefinitely at a yield of 0.25 percent, underscoring its determination to prevent rising global yields from pushing domestic borrowing costs too much.

Gbp/USD rose 0.16% to 1.3557, boosted by cross-selling against JPY.

Earlier, the Riksbank left policy broadly unchanged, stressing that the sharp rise in inflation was temporary. The Dovish stance of the Riksbank briefly pushed usd/CHF the most against major currencies, causing the Swedish krona to plunge 2.01% against the dollar to 9.31 krona.

Commodity currencies reversed earlier gains after Bullard's speech; AUDUSD was held back by the 100-day moving average at 0.7249.

Summary of institutional views

Institutional Analysis: The Fed could raise interest rates by 50 basis points, as the market expected

The Fed's strategy seems to be to quickly reach a neutral position without causing too much market disruption. Now that interest rate market expectations for a 50 basis point hike in March are already high, the Fed is happy to follow suit. St. Louis Fed President James Bullard, who has recently been a policy bellwether, supported that view today.

As Tim Duy, chief economist at SGH Macro Advisors, points out: If the market is priced at 50 basis points, the Fed will need to meet this expectation, otherwise it will be equivalent to substantial monetary easing, because market participants will perceive the response mechanism as less hawkish and adjust accordingly.

At present, despite the increase in market expectations for the number of interest rate hikes in the short term, financial conditions remain at historical lows. Fed policy affects the economy by influencing financial conditions. As a result, relatively accommodative conditions give the Fed the "freedom" to opt for a massive interest rate hike.

HSBC Strategists: Stagflation remains a challenge for the euro to strengthen

Despite the HAwkish shift in the ECB's wording, HSBC strategists are not convinced that this will lead to a stronger euro. Markets are clearly rethinking the outlook for the ECB and the euro, agreeing that there are more two-way risks for the euro, but still arguing that the euro "will eventually succumb to gravity." The challenge of stagflation in the eurozone is more pronounced than in the United States, and a rate hike by the Ecbbank will do little to improve the situation.

Strategists at HSBC said that the background of the US dollar is high growth and high inflation, and it is necessary to continue to tighten monetary policy, and the US dollar should be supported as short-term yield levels rise. Don't think that global central banks will suddenly want to buy euros because of the ECB's possible actions.

This article originated from Huitong Network