Dollar rises with US yields on dwindling Fed cut hopes

April 18 – The dollar index rose 0.18% after hawkish Philly Fed data and comments from Federal Reserve Bank of New York President John Williams reinforced the view rate cuts are off the table unless the US disinflation trend resumes, and though not his baseline forecast, the Fed would hike if data called for it.

Treasury yields rebounded 5-6bp from 2 to 10-year tenors. They had fallen back from Tuesday’s new 2024 highs that came in response far above forecast US retail sales and Fed Chair Jerome Powell and Vice Chair Philip Jefferson then affirming rate cuts would be delayed and were even more data-dependent.

Static, yet still quite low jobless claims, and weaker-than-forecast leading indicators and existing home sales had little impact on markets. Futures now price in a first Fed rate cut in either September or at the Nov. 7 meeting, two days after the US election. And total 2024 cuts of just 39bp are being priced in.

EUR/USD fell 0.26%, as ECB policymakers largely stuck to the view that rate cuts could begin by June and that inflation was likely to retreat further. That as the Bundesbank noted the German economy was doing a bit better, though “there is still no evidence of sustained improvement.” The eurozone’s current account surplus fell in February on weaker trade.

EUR/USD’s rebound from Tuesday’s low by 1.0600 looks like a correction, not the start of a trend reversal.

USD/JPY rose 0.14%, more than reversing earlier 153.96 lows as Treasury-JGB yield spreads rose on the Philly Fed and dwindling Fed rate cut expectations.

Prices still face major resistance by 155 and the potential threat of BoJ intervention to support the yen. That risk gained some credibility due to Wednesday’s US, Japan, and South Korea finance ministers’ agreement to “consult closely” on FX markets.

However, unless US data cool off, an intervention-driven USD/JPY drop would be viewed as a buying opportunity, because the BoJ is seen moving very gradually with any further rate hikes that could narrow very attractive Treasury-JGB yield spreads.

Friday’s Japan CPI data is unlikely to change that view, unless the core inflation rate rises for a second month instead falling to 2.6% from 2.8% in February as forecast.

Somewhat ironically, the Fed’s favored inflation gauge, core PCE due out on April 26, was also at 2.8% in February, though US core CPI inflation held steady for a second month at 3.8%.

Sterling fell 0.11%, led by falling Gilts-Treasury yields spreads, after correcting a small slice of its mid-April plunge. The BoE is now seen a bit more likely to cut rates in Q3 than the Fed, with swaps pricing in 43bp of cuts by year-end. That amid conflicting dovish and hawkish views from Governor Andrew Bailey on Wednesday and policymaker Megan Greene on Thursday.

UK March retail sales are due out Friday and are seen recovering from weak February results.

Risk-off flows into the dollar could rise again as US stocks continue to April’s retreat and pre-weekend geopolitical anxiety may rise.

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)