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Market Comment – Dollar trades sideways as focus turns to US yields



  • US stock indices under pressure as yields climb

  • German CPI could dictate next week’s ECB rhetoric

  • Yen underperformance lingers; all eyes on Friday’s Tokyo CPI

Dollar rallied on Tuesday, US stock indices were mixed

Following a couple of negative sessions, the US dollar showed its strength yesterday as it managed to outperform the euro. The continued hawkish commentary from Fed members is affecting market sentiment since the chances of a rate cut before the November elections are dropping. The bond market is acknowledging this situation as the 10-year US yield has climbed above the 4.5% level. On the flip side, US stock indices had a mixed day yesterday despite Nvidia still benefiting from the recent earnings boost.
the 10-year US yield has climbed above the 4.5% level
The data calendar is lighter today as the Beige Book will be published at 18:00 GMT and, barring a surprise, it will probably not prove market moving. Interestingly, two Fed speakers will be on the wires, Governors Williams and Bostic. They are both voting in 2024 and their commentary is unlikely to diverge much from the “patience” message that has been dominating the Fedspeak lately.

German CPI in the spotlight

The various German states have started reporting their respective inflation figures with the German aggregate print expected at 12:00 GMT. The market looks for a small acceleration to 2.4% yoy from 2.2% in April, but the initial prints from the certain German states are potentially opening the door to a small upside surprise. The euro area aggregate inflation data, a key input in ECB’s analysis, will be published on Friday.

In the meantime, the ECB blackout period has commenced, but the behind-the-door discussions continue. The hawks have endorsed next week’s rate cut but they are not convinced about the need for back-to-back rate moves. On the flip side, the doves are pushing for consecutive rate cuts especially as the German economy continues to struggle. Interestingly, the IMF suggested in a report yesterday that Germany should ease its debt brake to support growth. However, this looks unlikely as the German finance ministry fears that such a move would flare up inflationary pressures again.
the doves are pushing for consecutive rate cuts especially as the German economy continues to struggle
Yen continues to underperform

The yen remains on the back foot against most currencies as the mixed economic data are casting doubt on the BoJ’s ability to remain hawkish and hike again at the next few meetings. The initial smiles following Tuesday’s upside surprise in the services sector inflation quickly disappeared as the strong correction in the consumer confidence index is a strong setback for the BoJ. All eyes are now on Friday’s Tokyo CPI report.

The yen is trading at a new all-time low against the euro while the pound/yen pair is trading again above the 200 level, its highest print since August 2008. Interestingly, the yen’s underperformance is widespread as aussie/yen has also reached its highest level since 2013. Following the stronger monthly CPI print in Australia, chances of an RBA rate cut this year appear to be very slim. Actually, the market is assigning a 20% probability for a rate hike at the September meeting.
the yen’s underperformance is widespread as aussie/yen has also reached its highest level since 2013
Despite these negative market moves, Japanese officials appear relaxed as the dollar/yen pair is trading in the middle of its post-intervention range. As proved lately, this is the decisive factor for a BoJ reaction.


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