US dollar, pound gain ground, while euro dips

FX – US dollar reigns, BoE’s Bailey supports GBP

The US dollar is pushing higher, boosted by the jump in treasury yields, as rising inflation concerns remain under the spotlight ahead of the Federal Reserve’s meeting this week.

The benchmark 10-year treasury yield surged to 1.64%, its highest level since February 2020, although it has eased back slightly to 1.61% at the time of writing.

Friday’s US PPI data, which reflects wholesale inflation, posted its biggest annual gain in two years, painting an encouraging picture for the state of the US economy, even before President Biden’s USD1.9 trillion stimulus is added. Throw in the largest US stimulus bill in history and it’s easy to understand why markets fear the economy overheating.

While the Fed is not expected to adjust policy on Wednesday, they are expected to hike GDP and inflation forecasts. Jerome Powell will almost certainly be fielding a barrage of questions regarding inflation.

Fed Chairman Powell has only recently reaffirmed the dovish stance and yet the markets continue to see the inflation glass half full. Until now the market has shown to be unprepared to take onboard Fed comments regarding policy. There seems little reason to think Wednesday will be much different.

Dollar strength is the dominant force in an otherwise quiet day in the FX markets. The euro is gradually heading southwards towards key support at 1.19 on US dollar strength and growing Covid concerns on the old continent.

The euro is under pressure as concerns rise over Covid developments on the continent. Warnings of a third Covid wave in France, Germany and now Italy come at a time when the EU vaccine programme continues to flounder. Short supply is not the only concern, with an increasing number of countries also suspending AstraZeneca’s jab over fears of serious side effects.

The pound is showing more resilience after BoE Governor Andrew Bailey said that inflation is likely to pick up soon. These comments are music to the ears of pound bulls, particularly when US inflation expectations have been such a strong driving force.

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Sophie Griffiths
Sophie Griffiths is a market analyst with OANDA, focusing on the UK and Europe. With almost 15 years of experience, she brings with her a deep-seated understanding of the financial markets, providing timely and relevant fundamental analysis across a broad range of asset classes.