A couple of poor data points yesterday seemed to be enough to cause some jitters about the US economy. That resulted in a big drop in Treasury yields and that took the dollar down along with it. I want to say that in part there is a bit of a squeeze in positioning at play as well, considering that the reactionary hit to the data was rather outsized relative to the importance.
And I say that because the change in terms of pricing for the Fed outlook was not all too significant. Here’s a look at the Fed funds futures curve so far in August:
In any case, it is the bond market reaction that is the key thing and we did see yields take a plunge. There looks to be a tentative top now in 10-year yields as it is down to its lowest in nearly three weeks at 4.139% currently. The high this month hit 4.362% so that is roughly a 22 bps drop since peaking early last week.
It’s now a battle of the narratives as yields are not likely to climb further based on inflation developments. As such, bond bears have to look to overwhelming supply to drive their narrative while bond bulls can take heart in yesterday’s data and start to argue that weaker economic developments should drive yields lower instead.
What does this all mean for the dollar?
Well, the greenback has certainly been knocked off its perch to say the least. EUR/USD is now back above its 200-day moving average at 1.0865 on the day and is now caught in a tug of war in between said key technical level at 1.0810 and the 100-day moving average at 1.0925.
USD/JPY is also getting a bit of a reality check although it is still holding just above 146.00 on the day. Buyers will continue to hold out some hope as long as price action keeps above 145.00 but a drop below that could trigger a further squeeze lower for the pair moving forward.
Essentially, there is now a chink in the armor for the dollar and that is the prospect of the US economy going down the same path as Europe and the UK. For now, a slowdown is much welcome to convince the Fed to pause and validate the end of the tightening cycle.
But dollar bears will be hoping for more evidence of a deeper downturn, but not too deep so as to trigger a hard landing, so that it can sooner realise their timeline on rate cuts.
In that lieu, we might not have to wait too long with there being the US jobs report this Friday. And in the build up to that, there is also the ADP employment data today followed by the PCE index and weekly jobless claims data tomorrow.