- Treasury yields surge on unexpectedly strong US job growth in September
- Accordingly, the greenback appears to be marching towards key resistance
- This suggests the US dollar may continue its upward trend, while EUR/USD faces potential pressure if it breaks below a critical resistance level
Treasury yields surged to yet new yearly highs this morning after the nonfarm payrolls report showed that the US economy added far more jobs in September than economists expected. As of this writing, the 10-year yield is up 2.5%, further steepening the 10-2 yield curve.
As a result, the US dollar index has gained half a percentage point, closing in on the 107 level level, while the all important EUR/USD par has taken a dive back to the 1.05 support.
From a fundamental perspective, this marks a 180 turn from the previous sign of weakening labor market from the ADP private employment data that came in well below expectations earlier this week, putting selling pressure on the greenback.
It also comes on top of statements from San Francisco Fed President Mary Daly, who said the Fed may not need to raise interest rates further as progress is being made towards the 2% inflation target.
While adopting a dovish tone in her speech, Daily hinted that the tendency to hold rates steady may strengthen, citing signs of cooling in the labor market and a return to the inflation target. If Daly's view finds ground among other Fed Presidents, it is possible to see a change in opinion among 12 of the 19 members who favored a rate hike before the end of the year at last month's meeting.
On the other hand, some market commentators believe that the Fed has tightened the markets sufficiently and that the market may do what is necessary without the need for the bank to raise interest rates in the coming periods. Given that the high interest rate period is likely to continue in an environment of confidence provided by the US, bond demand may continue to increase and interest rate hikes may continue in this way.
Technical View: DXY, EUR/USD
Looking at the dollar index technically, it appear that the DXY is looking to test the critical resistance point at 108 after today's report. In the general outlook, we can see that the greenback will likely maintain its upward trend as long as it remains above the 106 band.
As for the EUR/USD, the rhetoric about the end of interest rate hikes in the Eurozone is gaining strength while the US yields keep on marching higher.
Against this backdrop, if the dollar manages to break below the 1.0435 level (the most critical resistance below), parity could come next as the air is very thin below that point.
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Disclosure: The author holds no positions in any of the securities mentioned in this report.
