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The US Dollar Index is trading neutrally at 104.15 on Wednesday, while markets assess several Fed officials’ statements to continue placing their bets on rate policy path at the next few Federal Open Market Committee meetings.
The Dollar Index steadied around 104.15 on Wednesday. Remarks and comments by Fed’s Collins, Kashkari and Kugler were sounding somewhat hawkish.
US Treasury yields limiting dollar’s slide
US Treasury yields are slightly up and limit the dollar’s losses. The US Fed’s hawkish stance, justified by a robust jobs report and continuous strong growth in Q1, has made dovish bets on the Fed less attractive over the past week.
US Treasury yields increased following the record sale of $42 billion in 10-year notes by the Treasury Department. The 10-year notes sold at a high yield of 4.093%, almost a basis point below their pre-auction trading level. The bid-to-cover ratio was 2.56 times, the same as in January’s 10-year sale.
The Treasury plans to continue gradually raising coupon auction sizes through April, but does not expect further increases due to current borrowing needs. A $54 billion sale of three-year notes also saw solid demand. The Treasury will also sell $25 billion in 30-year bonds on Thursday. Benchmark 10-year notes gained 2 basis points to 4.108%, while two-year yields rose 2 basis points to 4.425%.
As a reaction, the USD strengthened on the back of rising US Treasury yields as markets are giving up on a first rate cut arriving in March.
Hawkish Remarks
Fed’s Adriana Kugler noted that the job on inflation isn’t quite done, but that at some point when the economy cools down, the bank will consider rate cuts. Neel Kashkari stated that two to three rate cuts in 2024 seem appropriate.
In line with those comments, Susan Collins also cautioned that the bank needs more data to support rate cuts. The CME’s FedWatch Tool hints at reduced odds for a rate cut in March, which currently stands at 20%. Those odds rise to 50% for the May meeting, but the probabilities of a hold are also high.
Technical Factors
Technically; a number of indicators on the daily chart reflect a somewhat neutral to bearish short-term momentum. The Relative Strength Index (RSI) paints a picture of weakening bullish momentum, given its negative slope, despite being in positive territory.
This condition normally precedes a potential reversal or pullback as the buying force starts to lose its grip.
In the bigger picture, the Simple Moving Averages (SMAs) continue to favor the bulls. Despite the selling pressure pulling the asset below the 100-day SMA, it is comfortably residing above both the 20-day and 200-day SMAs. This demonstration implies that the overall buying force remains dominant.
These signals suggest while the buyers seem to be taking profits, further downside can be expected in the short term. But as long as the bulls defend the mentioned SMAs, the longer-term outlook will be bright.
