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Forex Markets Brace for Bond Crashes, Rate Hikes, and Dollar Dominance

by Onuraag Das   ·  May 26, 2023   ·  

The global forex markets are on edge as bond crashes, potential rate hikes, and the strengthening of the US Dollar dominate the financial landscape. In the UK, bond yields experienced a second consecutive day of decline, with yields increasing by 10.6-19.2 basis points across the curve. This downward trend was triggered by UK money markets anticipating an additional 100 basis points tightening by December following an unexpected upside Consumer Price Index (CPI) surprise earlier in the week. Although the Sterling initially surged to year-to-date highs, it failed to sustain the momentum for a higher break, leading to technical return action taking effect. Ultimately, EUR/GBP closed narrowly above 0.87, indicating a cautious market sentiment.

Meanwhile, the United States and Germany also witnessed a decline in bond prices and yields. The US bond market underperformed significantly, with yields surging between 0.9 basis points for the 30-year bond and 15.6 basis points for the 2-year bond. This surge was triggered by second-tier but above-consensus economic data, including weekly jobless claims, which alleviated concerns about a potential recession and financial stability. Furthermore, markets fully priced in the likelihood of a rate hike in July, driven by optimism surrounding negotiators reaching a debt ceiling deal. A proposed agreement of a two-year suspension in return for spending cuts is currently on the table. German yields followed suit, albeit from a distance, with changes ranging from +3.7 to 6.2 basis points. The 10-year yield tested the resistance area at 2.53%.

UK Bonds Crash, US Yields Rise, and Dollar Strengthens as Market Sentiments Shift

Amidst these market fluctuations, the US Dollar demonstrated remarkable strength. Even as Wall Street recorded gains of up to 1.7%, spurred by a rally led by Nasdaq and Nvidia, the USD continued its dominance. EUR/USD closed near an important support level of 1.0727, while the trade-weighted index surpassed the resistance at 104.089, closing at 104.25 – the highest level since mid-March. Another significant development was the USD/JPY crossing the 140 mark for the first time since November of the previous year.

In the Asian session today, the markets remained relatively quiet, with minimal news aside from the release of Tokyo Consumer Price Index (CPI) data. However, Speaker of the House McCarthy assured the public that efforts to reach a debt ceiling deal would continue until an agreement is reached, and there is a possibility that a deal could be struck over the weekend. Investors are eagerly anticipating the release of US Personal Consumption Expenditures (PCE) deflators and durable goods orders later in the day. The PCE deflators serve as the Federal Reserve’s preferred inflation gauge, and an acceleration from 4.2% to 4.3% on a monthly pace for the headline is expected. The core PCE is projected to remain unchanged at 4.6% on a monthly basis. If the outcomes align with expectations, it is likely to sustain the current bond yield trend at a less rapid pace. Additionally, the technical charts offer support, with the US 2-year and 10-year yields surpassing the levels of 4.50% and 3.80%, respectively. A weekly close above these levels would be a significant positive. A similar scenario applies to the DXY dollar index, as it tests the crucial levels of 104.089, while the EUR/USD hovers below 1.0727.

Check out the current value of UK Bonds

Before the opening of the markets, the United Kingdom received surprising news regarding April retail sales. The core gauge doubled the expected 0.4% increase, reflecting a positive outcome. However, this growth was accompanied by a downward revision of the March figure. In response, EUR/GBP barely reacted, and the 0.87 level remains intact for the time being.

In other news, the Reserve Bank of South Africa (SARB) recently implemented a 50 basis point increase in its policy rate, bringing it to 8.25%. This move was in line with analysts’ expectations. The SARB also slightly revised its growth forecast for the year, increasing it from 0.2% to 0.3%. However, the growth projections for 2024 and 2025 remained unchanged at 1.0% and 1.1%, respectively. Inflation forecasts for 2023 and 2024 were raised to 6.2% and 5.1%, respectively, indicating an upward shift. The SARB targets an inflation range of 3-6% and recognizes the risks of elevated inflation and associated uncertainties. Furthermore, the Bank highlighted the growing external financing needs, with the current account deficit expected to rise from 2.5% in 2021 to 3.6% in 2025. SARB Governor Kganyago expressed concerns about the elevated risk profiles of countries dependent on foreign capital due to tighter global financial conditions. Consequently, the South African Rand weakened significantly, reaching a record low against the US Dollar near USD/ZAR 19.84.

In Japan, the Tokyo area’s inflation data for May revealed mixed results. Inflation, excluding fresh food, decelerated more than anticipated, declining from 3.5% in April to 3.2%. However, the core measure, which excludes food and energy, unexpectedly rose from 3.8% to 3.9% – the highest level in over four decades. Tokyo’s inflation data is considered a reliable precursor for national inflation trends. These figures indicate that inflation might persist above the Bank of Japan’s 2.0% target for a considerable period, fueling debates about whether the central bank should gradually adjust its ultra-easy monetary policy. The combination of recent increases in US yields and the ongoing accommodative policy stance of the Bank of Japan temporarily pushed the USD/JPY cross rate above the psychological barrier of 140, currently hovering around 139.7.

As forex markets navigate the uncertainties brought about by bond crashes, the potential for rate hikes, and the Dollar’s dominance, investors closely monitor economic indicators, policy decisions, and global developments to guide their strategies and positioning in this evolving landscape.


In conclusion, the forex markets are bracing themselves for turbulent times as bond crashes, rate hikes, and the dominance of the US Dollar loom large. Recent developments, such as UK bond crashes, rising US yields, and the strength of the Dollar, have significantly impacted market sentiments. Additionally, the Reserve Bank of South Africa’s policy rate increase and Japan’s mixed inflation data add to the overall uncertainty. As investors await key economic indicators and policy decisions, they must navigate this shifting landscape carefully. With the forex markets on high alert, strategic positioning and close monitoring of global developments will be crucial in the coming days and weeks.

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