US recap: EUR/USD sheds gains as BoC hike lifts US yields, hits risk

June 7 (Reuters) – The dollar index recovered from early modest losses as Treasury yields rose with an assist from the BoC’s somewhat surprising rate hike and amid hefty Treasury and corporate US debt issuance before of next week’s Fed, ECB, and BoJ meetings.

The initial dollar slides versus CAD and AUD after Wednesday and Tuesday’s surprise BoC and RBA rate hikes came in for corrections as Treasury yields rebounded and risk came off.

USD/CNH resumed its rise amid tumbling Chinese exports, and Chinese banks cutting deposit rates and reportedly being told to lower the cap on dollar deposits, but mostly due to higher Treasury yields.

EUR/USD’s slip from early highs on ECB rate hike hopes merely left it flat on the day, as bund yields also rose roughly in line with Treasury yields. The pair remains in a tight range just above May’s 1.0635 lows on EBS.

The Fed remains priced to most likely skip hiking rates next week, waiting until July instead, but probabilities of a rate cut this year have dwindled.

The ECB is widely expected to hike 25bp next week and in July before going on hold until Q2 2024.

USD/JPY gained 0.37% on the back of 2- and 10-year Treasury yields rising roughly 5bp and 9bp, with JGB yields basically static due to the BoJ’s yield curve control, a policy seen enduring after next week’s BoJ meeting.

USD/JPY faces major resistance at 142.00-50, beyond May’s overbought 140.93 peak, as it, and the dollar more broadly, might need a more hawkish Fed outlook after CPI and the policy meeting next week to clear those hurdles.

Sterling fell back from 1.2500 highs to post a 0.2% gain, as risk-off flows and Treasury yields rise weighed versus the 100bp of BoE hikes still priced to come.

Thursday features jobless claims, but the focus is fully on next week’s CPI and central bank meetings.

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