US dollar draws support from fresh leg up in treasury bond yields

USD

In Washington, US President Joe Biden has authorised a further $800 million in military aid for Ukraine including heavy artillery, citing a “critical window” in the conflict as Russia has now retreated from the Kyiv area.

The Federal Reserve may now take a step back from its extremely hawkish stance on beating inflation. The US dollar drew support from a fresh leg up in US treasury bond yields, bolstered by hawkish Fed expectations, and has now recovered a major part of its early losses to the weekly low.

Investors have ramped up bets for an aggressive policy from the Fed as a result of high inflation – 8.5% year on year as of March – and of comments by dovish Fed officials, including Vice-Chair Lael Brainard. The current time seems ripe for raising interest rates fast, as not only inflation is high, but the labor market is “extremely tight” according to Powell. Nevertheless, money markets look to have gone too far. They are pricing not only a double-dose rate hike in the upcoming May 3 meeting but also such a non-standard move in June. After increasing borrowing costs by 25 basis points in March, the rates are set for another 100 basis points increase within the next two months.

GBP

For GBP/EUR, downside pressures would build on further possibilities of rate hike expectations from the European Central Bank. Although it remains to be seen just how committed one of the most ‘dovish’ central banks out there will be to raising rates. The ECB seems likely to do so as yesterday Vice President Luis de Guindos said interest rates could be raised as soon as July. UK economic growth is meanwhile expected to moderate, which should keep the Bank of England from raising interest rates as fast as the market expects.