US dollar rallies on rising yields

The US dollar index has pushed back over 92.00 and continues advancing supported by rising US Treasury yields.  The US Senate approving a USD1.9 trillion Covid relief bill is bolstering expectations of a strong US economic recovery this year whilst also boosting concerns over higher inflation expectations. These fears refuse to die down despite repeated assurances from the Fed that that monetary policy will stay loose. Is this a case of the bond market knows best and the Fed is the last to know?

The next FOMC meeting is next week and with no speaker between now and then, bond auctions and Wednesday’s inflation data will be the key focus for any further clues over rising price pressures. Headline CPI and the core read are both expected to show slight gains in the February releases. If the readings are higher than expected, we can expect concerns over the US economy overheating to get louder.

Euro slide continues

The euro is a notable victim of US dollar strength, tumbling below 1.19, to its lowest level in four months. Data hasn’t been that helpful with German Industrial Production -2.5% MoM in January, down from 1.9% in December and well short of 0.2% rise forecast. However, Eurozone Investor Sentiment numbers were more upbeat jumping to 5 after declining -0.2% in February. Optimism surrounding the vaccine rollout and reopening of economies in the bloc has boosted morale a fact that has been shrugged off the common currency.

The pound is trending mildly lower although has found some support from encouraging Covid numbers and the start of the economic reopening. Attention will shift firmly to BoE’s Andrew Bailey in his final appearance before the MPC next week. Investors will be listening closely for clues on the central bank’s stance to bond yields, interventionist a la ECB? Or no concern like the Fed?

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