10-Year Bond Yields Signal U.S. Dollar Could Jump
2023.07.10 11:26
The Treasury yield experienced an increase following the release of the Federal Reserve’s latest meeting minutes, and the benchmark 10-year Treasury yield rose to 4.039% on Thursday after a stronger-than-expected labor market report, with ADP Non-Farm Employment Change reaching 497K versus the expected 226K.
Moreover, the Fed’s June meeting minutes indicated that most Fed members still anticipated more rate hikes despite the pause in June. They emphasized the need for further moderation in policy firming to allow sufficient time to assess the effects of previous tightening measures.
Powell has also hinted at the possibility of announcing rate increases at a faster pace than previously expected.
Following their June meeting, at which rates were left unchanged, Fed officials stated that the pause allowed them to evaluate fresh data and the impact of previous rate hikes.
Based on CME FedWatch tool, traders are estimating an 88.7% probability of the Fed hiking rates again at its July meeting.
Why is the 10-year Treasury yield so important?
Currently, the 10-year Treasury yield strongly correlates with the and acts as a forward indicator for the US dollar.
Government bond yields indicate a nation’s interest rates and future expectations. The second chart demonstrates that the yield on US government 10-year bonds surpassed a resistance trendline, aligning with the Federal Reserve’s overall hawkish sentiment. In light of the increasing bond yield, it can be inferred that the US dollar is expected to grow in the medium term.
Technical analysis
The currency pair forms the right shoulder of a “head and shoulders” reversal pattern. Moreover, trading volumes have decreased to the levels at which trend reversals usually occur. That’s why in the middle- and long-term FBS expect a significant decline of the pair.
A downward movement below the support level at 1.0660 would indicate a breakout, potentially leading to further declines toward the targets of 1.0250 and 0.9680. If the first target is breached, the subsequent breakout will extend the downward trend toward the second target level.
