The dovish comments from the Federal Reserve Chairman Jerome Powell on Tuesday and Wednesday only temporarily helped ease concerns about rising US government bond yields. By Thursday, the pressure on the markets returned.
Ahead of this, major US stock indexes fell sharply. If not long ago they renewed record highs, now there is no confidence in further growth, and any rise is used to fix profits.
The prospect of a sustained recovery in the US economy in the second half of the year, especially in light of the next round of fiscal stimulus, leads to a sell-off in US government bonds. As a result, their profitability increases.
Another reason for the rise in Treasury yields is heightened inflation expectations, which reflect investor concerns about a possible surge in prices.
The latter fear that the acceleration of inflation in the United States may push the Fed to raise interest rates earlier.
Fed officials don't seem to share these concerns. They continue to reassure market participants that the Central Bank's policy will remain unchanged for the foreseeable future (low rates and stable QE) until the US labor market reaches full employment.
The head of the Federal Reserve Bank of Kansas City, Esther George, said on Thursday that it is too early to talk about curtailing the Fed's stimulus programs. According to her, a significant increase in the interest rates of long-term US bonds does not require a response from monetary policy. Moreover, George said that this growth largely reflects optimism about the prospects for the recovery of the national economy and can be regarded as a positive signal.
This week, traders hoped to get hints from Powell and his colleagues on the possibility of QE expansion, which could stop the soaring of long-term government bond yields. However, the head of the Federal Reserve said that the regulator is not going to intervene in this matter yet. Perhaps the sharply increased volatility in the markets will force the Fed to change its mind.
In the meantime, due to the continued growth of Treasury yields, risk aversion is observed everywhere.
Against this background, the greenback shows a confident recovery against its main competitors, including the euro, after two sessions of weakening.
The USD index climbed above 90.7 points on Friday after hitting one-and-a-half month lows of 89.69 points on Thursday.
The dollar was supported by the positive statistics on the US released the day before.
Thus, the number of initial applications for unemployment benefits in the country last week decreased from 841,000 to 730,000. The value of the indicator became the lowest since December.
In January, orders for durable goods increased by 3.4% against the expected increase of 0.9%.
Unlike their American counterparts, ECB officials are closely following the dynamics of long-term bond yields in the EU.
According to Isabel Schnabel, a member of the ECB's Governing Council, the regulator will not allow an unjustified tightening of financial conditions in the region.
"We will continue to monitor the growth of yields," said ECB chief economist Philip Lane.
"Further cuts in interest rates are still a viable option, all instruments are available," he added.
Based on this, there is reason to believe that the EUR/USD pair should trade lower.
On Thursday, it broke above the 1.2200 mark for the first time since the beginning of January, however, it could not hold on to the reached levels for a long time and rolled back.
In the context of an empty economic calendar for the eurozone today, the main currency pair is trading under the influence of the dynamics of the dollar and the demand for risk.
To maintain a positive outlook, EUR/USD needs to hold above 1.2110.
Further support is at 1.2080, 1.2050, 1.2025, and 1.2000. In case of a breakdown of the last level, the pair risks falling to 1.1800.
Strong resistance comes at 1.2150, followed by 1.2180, 1.2220, and 1.2245.
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