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US Dollar Gains but US Yields, Rate Hike Odds Fall - Market Minutes

US Dollar Gains but US Yields, Rate Hike Odds Fall - Market Minutes

Christopher Vecchio, CFA, Senior Strategist
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Market Minutes Overview:

  • The US Dollar (via the DXY Index) is at levels that would constitute its high close for July, just days after the ‘goldilocks’ June US nonfarm payrolls report.
  • Falling US Treasury yields and US rate hike expectations draw into question the legitimacy of US Dollar strength.
  • Coming out of the US holiday weekend, and with European football semi-finals this week, various measures of volatility continue to decline.
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A Mixed Bag

The US yield curve is flattening. US equity markets are dipping. Some agricultural commodities are limit down. And with the US Dollar (via the DXY Index) at levels that would constitute its high close for the month despite USD/JPY rates falling back, it appears that markets are in a ‘risk-off’ mood following the ‘goldilocks’ June US nonfarm payrolls report and US holiday weekend.

There may be a good reason to suggest that it’s the risk-off nature of markets pushing the US Dollar higher rather than some domestic-oriented factor: rate hike odds aren’t following.

We can measure whether a rate hike is being priced-in using Eurodollar contracts by examining the difference in borrowing costs for commercial banks over a specific time horizon in the future. Chart 1 below showcases the difference in borrowing costs – the spread – for the July 2021 and December 2023 contracts, in order to gauge where interest rates are headed in the interim period between July 2021 and December 2023.

Eurodollar Futures Contract Spread (July 2021-December 2023): Daily Rate Chart (March to July 6, 2021) (Chart 1)

At their high last week after the June US nonfarm payrolls report, there were 107-bps worth of rate hikes discounted by December 2023; now, there are 92-bps priced-in. Markets are taking a less hawkish view of the FOMC; typically, this has corresponded with US Dollar weakness.

Video Technical Notes: DXY Index

  • The DXY Index is rebounding from familiar territory around the 23.6% Fibonacci retracement of the 2018 low/2020 high range and the 38.2% Fibonacci retracement of the 2011 low/2020 high range near 91.90. As a result, a bullish daily outside engulfing bar is forming.
  • Bullish momentum is firming. The daily 5-EMA continues to serve as support with the entire daily EMA envelope aligned in bullish sequential order. Daily MACD is rising while in bullish territory, while daily Slow Stochastics are holding in overbought territory. It remains the case that a run towards triangle resistance near 92.75 may be in the cards soon.

An Interesting Calendar

Coming out of the holiday week, and with European football semi-finals this week (today and tomorrow), various measures of volatility continue to decline. In this context, the economic calendar appears like an oasis this week: in what should be an otherwise quiet environment, data releases offer succor in the form of event risk volatility.

The June FOMC meeting minutes are first on the radar, followed by Chinese and Mexican inflation readings on Thursday that could ignite a spark in the commodity currency complex (AUD, CAD, NZD).

DailyFX Economic Calendar, ‘High’ Rate Events, Next 48-hours (Table 1)

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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