Forex Today: US Dollar struggles amid cautious mood, falling yields

Here is what you need to know on Thursday, January 19:

The US Dollar is struggling to extend Wednesday’s V-shaped recovery so far this Thursday, in the wake of the persistent weakness in the US Treasury bond yields amid risk-aversion. Risk-off flows dominate, as the Asian markets follow the Wall Street indices lower. Major US indices lost over 1% on renewed fears over a potential US recession following the disappointing US consumer spending and industrial data. The fight to safety rush into the US government bond market is driving the Treasury bond yields lower across the curve. The recent sell-off in global yields was triggered by the Bank of Japan’s (BoJ) decision to make no changes to its yield control policy a day before and smaller US Federal Reserve (Fed) rate hike expectations.

At the time of writing, the two-year US Treasury bond yields are trading at their lowest level since October 2022, near 4.0% while the US S&P 500 futures lose 0.12% on the day. Meanwhile, the US Dollar index has edged lower, erasing early gains to trade flat at around 102.30.

Mixed Fed commentary is also leaving markets in limbo, although markets continue pricing 25 basis points (bps) Fed rate hike in the next two months. Early Asia, Philadelphia Fed President Patrick Harker reiterated that he's ready for the Federal Reserve to move to a slower pace of interest rate rises. Dallas Fed Chief Lorie Logan also supported the case for 25 bps rate increments going forward.

Across the FX board, the Japanese Yen is the strongest while the Australian Dollar remains the weakest. Renewed recession fears boost the safe-haven status of the Yen, as markets digest the BoJ deliberations. USD/JPY has surrendered the 128.00 level, enduring heavy selling pressure in early Europe.

AUD/USD and NZD/USD are reeling from the domestic fundamentals-induced blow. The Australian employment data disappointed, with the number of employed Australians falling by 14.6K in December vs. 22.5K and 64K previous. The Australian Unemployment Rate edged higher to 3.5% in December vs. the 3.4% expected while the Participation Rate dropped to 66.6% from 66.8. The dismal jobs data weighed on the Reserve Bank of Australia’s (RBA) rate hike expectations, smashing AUD/USD to near 0.6900.

Meanwhile, the NZD/USD pair tumbled toward 0.6400 after New Zealand’s Prime Minister Jacinda Ardern said she would step down from the leadership position on February 7, well ahead of the October 14 general election. Meanwhile, USD/CAD is holding steady at around 1.3500 amid a subdued US Dollar and falling WTI prices. The US oil is down 1.25% on the day at $78.53 so far, amid recession risks.

EUR/USD is wavering around 1.0800, awaiting European Central Bank (ECB) President Christine Lagarde’s speech for fresh hints on the rate hike path. Meanwhile, the Eurozone Current Account data and ECB monetary policy accounts will be closely scrutinized by market participants.  

GBP/USD is trading on the back foot below 1.2350, retreating from five-week highs amid risk-aversion. The Bank of England (BoE) Q4 Credit Conditions Survey is the only relevant data for the Pound Sterling this Thursday. Although traders will await the US Jobless Claims, Housing data and Fed speeches for fresh trading incentives.

Gold price is holding higher ground above $1,900 amid falling US Treasury bond yields, as investors assess chances of slower Fed rate hikes pace.

Bitcoin is off the lows but still trading below the $21,000 level, defending minor gains while Ethereum is struggling above the $1,500 barrier amid reduced risk appetite.