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US dollar rallies on soaring US Treasury yields

Philip McHugh January 19th 2022 - 2 minute read

The US dollar rocketed on Tuesday as market jitters over Federal Reserve monetary policy tightening pushed US Treasury yields to two-year highs.

Meanwhile, the pound is trading in a narrow range so far this morning, with GBP/EUR flat at €1.1996 and GBP/USD stable at $1.3596. GBP/CAD is rangebound at C$1.7008, while GBP/AUD and GBP/NZD hold steady at AU$1.8919 and NZ$2.0042, respectively.

Will a stronger-than-expected UK inflation reading help to underpin Sterling through today’s session?

What’s been happening?

The pound came under pressure on Tuesday following mixed UK jobs market data, as the threat of a cost-of-living crunch weighed on Sterling.

While the unemployment rate unexpectedly dropped in the three months to November to 4.1% from 4.2%, wage growth fell behind UK inflation meaning a pay decline in real terms.

Concerns over the surging cost of living in the UK caused some investors to reduce expectations for aggressive interest rate rises from the Bank of England (BoE) through 2022, although a February hike looks likely.

Meanwhile, the US dollar surged yesterday in line with US Treasury yields, which jumped to pre-pandemic levels as US markets reopened after Monday’s holiday.

Investors increased expectations for aggressive policy tightening from the Federal Reserve, including four interest rate hikes this year, which pushed US Treasury yields higher and boosted USD.

At the same time, the euro tumbled due to its negative correlation with the soaring US dollar on Tuesday afternoon.

Better-than-expected German ZEW economic sentiment surveys had bolstered the single currency earlier in the session, but gains were short-lived.

What’s coming up?

The release of December’s UK consumer price index rate this morning indicated inflation rose to 5.4% in December and could drive fresh volatility in the pound again today.

As the reading will likely increase pressure on the BoE to raise interest rates at its February policy meeting, Sterling may trend higher today.

In the absence of notable US data releases, market risk appetite and US Treasury yields holding near two-year highs may underpin support for the US dollar.

Meanwhile, the finalised German consumer price index confirming inflation soared to 5.3% in December may weigh on EUR sentiment today as it may undermine the credibility of the European Central Bank’s view that inflation is transitory.

Written by
Philip McHugh

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