Will US dollar continue to rise? Depends on bonds…

USD/JPY hits 150.00

In recent market developments, the US dollar (USD) has surged to new highs for the year, with an impressive rally against the Japanese yen (JPY), where the USD/JPY pair soared past the 150.00 mark. This level has not been seen since November, with the 30-year high resting at approximately 151.50. The force behind the greenback’s strength can be largely attributed to the climbing yields in the United States.

10-years on the rise

The yields on 10-year US Treasury notes, which often serve as a benchmark for global finance, have risen sharply. This uptick came on the heels of hotter-than-expected inflation data, which has subsequently dampened the market’s anticipation of rate cuts by the Federal Reserve. Traders and investors alike are now contemplating a critical question: could the US dollar ascend to new historic highs?

EUR/USD still far from lows

The performance of the US dollar has been notably strong against other major currency pairs, including the euro (EUR), hitting 1.0700 midweek. Despite the bullish trend, it’s worth noting that sentiment among traders is often two-sided. For instance, 58% of those trading EUR/USD at IG are positioned long, betting on the euro’s strength. This demonstrates a significant belief in the potential for the euro to rally despite the dollar’s current dominance.

Much of this momentum hinges on the Federal Reserve’s monetary policy decisions. If the Fed opts to maintain rates, and the eurozone cuts rates first, the dollar could continue its upward trajectory.

What’s in store for interest rates in 2024

Currently, interest rate futures (CME FedWatch tool) are suggesting a more reserved outlook, with projections indicating only four 25 basis point cuts in 2024. This is a conservative stance compared to previous expectations, which reflects a market that is bracing for a more hawkish Fed in the face of persistent inflation.