Adapted from the original article by James Skinner, published on PoundSterlingLive.com.
Title: EUR/USD Pressured by Global Bond Rout and Hawkish Fed Rhetoric
The euro has experienced sharp losses against the US dollar as a global bond sell-off unfolds amid a weakening risk appetite. Furthermore, persistent hawkish signals from the United States Federal Reserve continue to boost the greenback across major currency pairs.
At mid-week trading, the euro-dollar exchange rate (EUR/USD) is struggling to hold above 1.07, as the dollar strengthens following a sharp rise in US Treasury yields. The move is part of a broader repricing in global fixed income markets, which has caused heavy losses in sovereign bond markets this week.
Key Developments Driving EUR/USD Weakness:
– U.S. bond yields have surged following stronger-than-expected economic data coupled with the Federal Reserve’s unrelenting cautious stance regarding rate cuts.
– Global bond markets are following suit, with yields rising in Europe and Asia, indicating rising expectations that interest rates in major economies will remain elevated for longer.
– Safe-haven inflows into the US dollar are being supported by this reassessment of global interest rate expectations.
– In response, risk-sensitive currencies like the euro are losing ground, weighed down further by underwhelming eurozone macroeconomic indicators.
Global Bond Rout and Rising Yields:
One of the primary catalysts behind the euro’s recent weakness is the global bond sell-off, which has led to a surge in yields across multiple geographies.
– The yield on the 10-year US Treasury note climbed above 4.6 percent earlier in the week, its highest level in over a month.
– European bond yields are also higher, with the benchmark German 10-year bund yield exceeding 2.5 percent.
– The sharp rise in yields reflects growing conviction among investors that major central banks, led by the Federal Reserve, will keep interest rates at elevated levels longer than previously anticipated.
The revaluation comes amid a general unwillingness by the Fed to soften its tone on policy normalization. Despite earlier market hopes for imminent rate cuts, US policymakers continue to stress the importance of achieving sustainable progress on inflation before loosening monetary policy.
Hawkish Fed Commentary Fuels Dollar Strength:
Numerous members of the Federal Open Market Committee (FOMC) have reiterated their preference for a cautious approach to monetary policy. These remarks have proven to be instrumental in supporting the dollar in recent sessions, especially against the euro.
– On Tuesday, New York Fed President John Williams stated that he does not see an urgent need to reduce interest rates at present, citing the resilience of the US economy and uneven progress on inflation.
– Fed Governor Michelle Bowman echoed this sentiment, suggesting that it may still be appropriate to increase interest rates if inflation progress stalls further.
– Minneapolis Fed President Neel Kashkari added fuel to the hawkish fire, warning that stronger-than-expected growth may sustain inflation risks, forcing the central bank to pause rate cut plans for longer.
These comments overturned some expectations that rate cuts could begin as early as mid-2024. The result has been a marked rebound in the US dollar against most counterparts, particularly the euro, which is struggling to rally amid weak domestic fundamentals.
US Economic Strength Adds Pressure on Euro:
The resilience of the US economy has continued to surprise markets on the upside in 2024. The labor market remains robust, and consumer spending is holding firm, supporting the Fed’s stance of “higher for longer” in terms of interest rates.
– The ISM Services PMI released earlier this week rebounded to 53.8 in May after falling to 49.4 in April, showing the service sector is firmly in expansion territory.
– Job openings data also surprised markets, with vacancies rising to 8.1 million in May from 7.9 million previously, a sign that the labor market remains tight.
These data points contrast sharply with economic softness in the eurozone, where recent
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