US Dollar Retreats Following Fed’s Beige Book, Lower Treasury Yields

The Fed’s Beige Book showed slight economic activity expansion since late February, but Fed Chair Jerome Powell warned that there is little progress on inflation and that the bank remains data-dependent. The possibility of a rate cut in the next meeting in June stands at around 15%, and the chances for a July rate cut have fallen below 50%. The first-rate cut is expected to take place in September with a 95% probability, followed by another in December at a 70% probability.

US Treasury yields are declining but remain at multi-month highs, with investors focusing on Fed Chair Powell’s hawkish stance. The US Dollar Index (DXY) declined below 106.00 during the American session, but the outlook for the US dollar is positive, as hawkish bets on the Federal Reserve might act as a cushion. The US economy is experiencing sticky inflation and robust growth, and Fed Chair Powell’s hawkish stance suggests that market tightening through higher yields and wider spreads strengthens the USD. However, further tightening is required due to loose financial conditions.

The US Treasury yields for 2-year, 5-year, and 10-year bonds are currently at 4.93%, 4.63%, and 4.61%, respectively, down on the day. Technically, the DXY displays bulls’ stronghold despite overbought conditions, and the Moving Average Convergence Divergence (MACD) shows decreasing green bars, implying that buying momentum is losing steam and bears may soon take charge.