Higher Front-End US Yields Served Dollar Well Recently – Action Forex

Markets

Volatility remains high in the US Treasury market. We believed that Wednesday’s in-line with consensus CPI inflation report could be the start of a consolidation process on the sell-off which started mid-September. Fed Chair Powell’s comments on Thursday (“not in a hurry”) and retail sales on Friday twice ended the tentative correction higher before it even started. Headline retail sales were somewhat stronger than expected (+0.4% M/M) while slight disappointment in core gauges (+0.1% M/M) and for the retail control group (-0.1% M/M) were completely erased by a huge upward revision to already good September data (control group +1.2% M/M from +0.7% M/M). On both occasions, US Treasuries tested the sell-off lows but failed to break lower. Daily changes on the US yield curve ranged between -4.2 bps (2-yr) and +3.1 bps (30-yr). It strengthens our view that the time is there for some rebound action higher. Especially given deteriorating risk sentiment. Main US equity indices lost 0.7% (Dow) to 2.25% (Nasdaq) in what was the S&P’s worst week in more than two months. The vacuum on the US calendar comes in handy as well. Fed Powell’s comments minify the potential market impact of this week’s avalanche of Fed speakers. If any, they could even prompt a new increase of watered-down market bets on a December Fed rate cut (65%). From a data point of view, it will be a waiting game into Friday’s November PMI business surveys.

Higher front-end US yields served the dollar well recently. The same combo Powell-retail sales twice triggered a tentative move to reach for EUR/USD 1.05, but again without conviction. A correction in US Treasuries could in theory provide some breathing space in the pair, but the risk-off climate, rising gas prices (see below) and market conviction on a stimulative ECB monetary policy in 2025 to help the EMU economy all suggest that the rebound potential remains low. Just like in the US, we have a lot of ECB speeches this week. Apart from PMI’s, we also keep a close eye on Q3 wage data which are published on Wednesday.

Attention went to Japan this morning where Bank of Japan governor Ueda gave a final major speech ahead of the December 19 policy meeting. He kept close to recent comments, reiterating that “the actual timing of the adjustments (in the policy rate) will continue to depend on developments in economic activity and prices as well as financial conditions going forward”. That way he didn’t drop a hint that a next hike could be around a corner. There was some speculation that recent JPY weakness in combination with sticky inflation could trigger such frontrunning. JPY is a tad weaker this morning around USD/JPY 154.60.

News & Views

Dutch natural gas prices spiked to the highest in a year over the last couple of days. The surge towards €46/MWh and more are the result of supply concerns. Russia’s Gazprom warned Austria’s biggest oil and gas company that it would halt deliveries in response to the Austrian company seeking to reclaim hundreds of millions of euros over past contract violations by Gazprom. Russia made good on the threat over the weekend. With Ukraine’s transit deal with Moscow to supply Slovakia scheduled to run out at the end of this year, there could be an additional crunch in the midst of the heating season. The supply worries coincide with European countries dipping into their reserves earlier than usual amid chilly weather and slumping energy production from renewable sources.

UK’s Rightmove said that asking prices for British homes fell by 1.4% m/m in November to 1.2% y/y. The property portal noted it was an unusually big dip for the time of the year, which is typically something around 0.8%. The survey was squeezed in between the release of finance minister Reeves’ October 30 budget and the Bank of England policy meeting (Nov 7). When publishing new forecasts for 2025 it said that “The big picture of market activity remains positive when compared to the quieter market at this time last year. This sets us up for what we predict will be a stronger 2025 in both prices and number of homes sold.” Rightmove expects house prices to rise by 4% new year, its highest prediction since 2021.