US 10-yr yield minus 2-yr yield & USD/JPY comparison chart
-636330099730539937.png)
The chart above clearly shows the strength in the American dollar is clearly dependent on the performance of the 10-year yield curve. A steeper yield curve (a bigger rise in 10-yr yield) is positive for the USD and vice versa.
Fed rate hikes don’t yield a steeper yield curve
Fed has delivered two rate hikes in the last six months. However, the yield curve has flattened since the beginning of the year… mainly because the long-term inflation expectations dropped.
10-year breakeven rate (long-term inflation expectations) and US 10-yr yield minus 2-yr yield comparison chart
-636330100588134090.png)
It is quite clear from the above chart that a steeper yield curve is dependent on long-term inflation expectations.
Thus, we can conclude that the fate of the US dollar is more dependent on the US consumer price index (CPI) due today at 12:30 GMT.
Watch out for a bull trap in the USD
The 25 basis point rate hike has already been priced-in by the markets. A minor spike in the USD cannot be ruled out if the Fed still sees a potential for one more rate hike in 2017. However, it could be a bull trap as the hawkish interest rate forward guidance alone may not yield a steeper yield curve.
As seen in the above charts, it is the rise in inflation expectations that could yield a steeper yield curve.
What else can yield a steeper yield curve & strong dollar?
The long duration yields could spike if the Fed details its intentions to unwind its $4.5 trillion balance sheet later this year. Fed would first stop reinvesting the proceeds of its bond holdings followed by off loading of its bond holdings. Both measures would tighten liquidity and boost long duration yields, leading to a strong US dollar.
USD/JPY Weekly chart
-636330101933847696.png)
- The weekly 50-MA has bottomed out and is now sloping upwards
- Last week’s candle had a long tail, suggesting dip demand around 109.10 levels.
- Thus, the pair looks set to break higher from the falling channel/flagpole pattern. The immediate resistance is seen at 111.59, ahead of 112.60 (weekly 100-MA).
- A steeper yield curve after US CPI release and Fed rate decision could yield a sustained break above 111.59 levels.
- On the other hand, a weaker CPI and a dovish Fed hike would open doors for a break below 108.13 (April low).
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended Content
Editors’ Picks
EUR/USD eases to near 1.0700 ahead of German inflation data
EUR/USD is paring gains to near 1.0700 in the European session on Monday. The pair stays supported by a softer US Dollar, courtesy of the USD/JPY sell-off and a risk-friendly market environment. Germany's inflation data is next in focus.
USD/JPY recovers after testing 154.50 on likely Japanese intervention
USD/JPY is recovering ground after sliding to 154.50 on what seemed like a Japanese FX intervention. The Yen tumbled in early trades amid news that Japan's PM lost 3 key seats in the by-election. Focus shifts to the US employment data and the Fed decision later this week.
Gold price holds steady above $2,335, bulls seem reluctant amid reduced Fed rate cut bets
Gold price (XAU/USD) attracts some buyers near the $2,320 area and turns positive for the third successive day on Monday, albeit the intraday uptick lacks bullish conviction.
Ripple CTO shares take on ETHgate controversy, XRP holders await SEC opposition brief filing
Ripple loses all gains from the past seven days, trading at $0.50 early on Monday. XRP holders have their eyes peeled for the Securities and Exchange Commission filing of opposition brief to Ripple’s motion to strike expert testimony.
Week ahead: FOMC and jobs data in sight
May kicks off with the Federal Open Market Committee meeting and will be one to watch, scheduled to make the airwaves on Wednesday. It’s pretty much a sealed deal for a no-change decision at this week’s meeting.