Looking at how Japan’s authorities are concerned about the yen’s weakening, you start to wonder why the Federal Reserve isn’t worried about the swift rally in U.S. Treasury yields. On one hand, this is good for the central bank. Financial conditions are tightening, the economy is cooling down, and inflation growth rates are falling. However, the feedback loop has not been canceled: a rise in real interest rates on debt to levels not seen since 2007 can do more than just cool down the U.S. economy—it can freeze it. Can EUR/USD take advantage of this?
There hasn’t been any news about a recession in the United States for a long time. Since mid-2023, investors have only been talking about a soft landing, about the resilience of the United States to the Federal Reserve’s aggressive monetary restriction. Not a word about a downturn. At the same time, the inversion of the yield curve, which was at 107.5 basis points in July, has decreased to 31.7 basis points. The problem is that such dynamics of the indicator in the past were accompanied by recessions.
Dynamics of the yield curve in the USA
In reality, this is the nature of markets: as soon as investors are convinced of the strength of the trend, something happens that reverses it. Pessimism gives way to optimism on the spot. Just like Fear turns into Greed. Six months ago, the version of a soft landing for the U.S. economy seemed unlikely. Investors were speculating about when the downturn would occur, when the Fed would make a dovish pivot, when the dollar would lose its gains from previous years. Now, these questions seem detached from reality.
However, in the conditions of such a rapid rally in U.S. Treasury yields, a downturn in the United States is only a matter of time. No one knows exactly where the 10-year bond yields will stop: at 5%, 5.5%, or 6%. There is no specific level at which people are willing to buy falling daggers—U.S. bonds being sold on every corner. Barclays believes that the only thing that can save their fans and reverse the yields is a sharp crash in the U.S. stock market.
Dynamics of bond yields and S&P 500
In fact, this version corresponds to the repetition of the events of Black Monday in 1987 described in the previous material. 26 years ago, the Dow Jones index recorded the worst 22% drop in history, Treasury bond yields plummeted, and the U.S. dollar weakened significantly.
History repeats itself. And, despite very weak statistics on U.S. employment for September, it did not cause serious disruptions in the financial markets. Nowadays, bad economic news is perceived as positive for the S&P 500. However, if the data turns out to be terrible, the stock index could suffer, as could bond market rates. In such a scenario, the bulls on EUR/USD would come out on top.
Technically, on the daily chart of the main currency pair, buyers are trying to launch a counterattack. Breaking through the lower boundary of the fair value range of 1.0535–1.0770 could accelerate this process and provide a basis for short-term EUR/USD purchases. However, a retreat from resistance levels at 1.0595 and 1.0645 would signal a reversal and a shift to shorts.
The material has been provided by InstaForex Company – www.instaforex.com
Looking at how Japan’s authorities are concerned about the yen’s weakening, you start to wonder why the Federal Reserve isn’t worried about the swift rally in U.S. Treasury yields. On one hand, this is good for the central bank. Financial conditions are tightening, the economy is cooling down, and inflation growth rates are falling. However, the feedback loop has not been canceled: a rise in real interest rates on debt to levels not seen since 2007 can do more than just cool down the U.S. economy—it can freeze it. Can EUR/USD take advantage of this?
There hasn’t been any news about a recession in the United States for a long time. Since mid-2023, investors have only been talking about a soft landing, about the resilience of the United States to the Federal Reserve’s aggressive monetary restriction. Not a word about a downturn. At the same time, the inversion of the yield curve, which was at 107.5 basis points in July, has decreased to 31.7 basis points. The problem is that such dynamics of the indicator in the past were accompanied by recessions.
Dynamics of the yield curve in the USA
In reality, this is the nature of markets: as soon as investors are convinced of the strength of the trend, something happens that reverses it. Pessimism gives way to optimism on the spot. Just like Fear turns into Greed. Six months ago, the version of a soft landing for the U.S. economy seemed unlikely. Investors were speculating about when the downturn would occur, when the Fed would make a dovish pivot, when the dollar would lose its gains from previous years. Now, these questions seem detached from reality.
However, in the conditions of such a rapid rally in U.S. Treasury yields, a downturn in the United States is only a matter of time. No one knows exactly where the 10-year bond yields will stop: at 5%, 5.5%, or 6%. There is no specific level at which people are willing to buy falling daggers—U.S. bonds being sold on every corner. Barclays believes that the only thing that can save their fans and reverse the yields is a sharp crash in the U.S. stock market.
Dynamics of bond yields and S&P 500
In fact, this version corresponds to the repetition of the events of Black Monday in 1987 described in the previous material. 26 years ago, the Dow Jones index recorded the worst 22% drop in history, Treasury bond yields plummeted, and the U.S. dollar weakened significantly.
History repeats itself. And, despite very weak statistics on U.S. employment for September, it did not cause serious disruptions in the financial markets. Nowadays, bad economic news is perceived as positive for the S&P 500. However, if the data turns out to be terrible, the stock index could suffer, as could bond market rates. In such a scenario, the bulls on EUR/USD would come out on top.
Technically, on the daily chart of the main currency pair, buyers are trying to launch a counterattack. Breaking through the lower boundary of the fair value range of 1.0535–1.0770 could accelerate this process and provide a basis for short-term EUR/USD purchases. However, a retreat from resistance levels at 1.0595 and 1.0645 would signal a reversal and a shift to shorts.
The material has been provided by InstaForex Company – www.instaforex.com
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