Technical Analysis

US dollar takes it all back as yields turn higher

The dollar is going for a ride in the aftermath of the CPI report. EUR /USD rose to 1.0832 but has given most of the gains back in a return to 1.0780.

The initial move lower in the US dollar came as the market largely priced out the chance of a 50 bps hike in February. Morgan Stanley is also out with a note saying the Fed will hike 25 bps more in February and that will be the end of the hiking cycle.

However the bond market is struggling for direction. Yields initially fell lower today and US 10s hit 3.45% but have rebounded to 3.53%.

I continue to point to BOJ-inspired flows as a big skew in the market that’s sending false signals. USD/JPY is down 212 pips today after a report indicated the BOJ is worried about the consequences of QE and YCC.

The result was likely JGB selling and Treasury buying but the broader market read the fall in US yields as a dovish signal. Those flows have been absorbed now and the dollar has bounced.

The whole scenario highlights the importance of next week’s BOJ meeting, which is currently an underrated risk.

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