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China considers Taiwan its breakaway province. It is going to conduct live-fire military exercises around Taiwan until August 7. These actions have already faced harsh criticism from the Taipei government, the US, Japan, and the EU. So, risk appetite is declining due to growing geopolitical risks, the Fed’s hawkish comments, and expectations of the Nonfarm Payrolls report. Speculators also took notice of changes in US Treasury yields.

Overnight, the yield curve between 2-year and 10-year government bonds exceeded 39 basis points. As a rule, such a gap signals an inversion and a recession. Despite some clear signs of a recession in the bond market, investors are more focused on NFP data. The Nonfarm Payrolls report may provide hints about the Fed’s future plans on monetary policy. It will also show whether a recession is really looming on the horizon.

However, even if the US economy is showing signs of a downturn, it will hardly force the Fed to adjust monetary policy. The regulator seems poised to proceed with monetary tightening in the near future. The Fed is likely to stick to aggressive rate hikes because of persistently high inflation. President of Cleveland Fed Loretta Mester practically confined such a scenario in her speech yesterday. She is in favor of raising interest rates and keeping them at these levels for some time. Only when inflation approaches the 2% target, the Fed may consider rate cuts.

The US dollar failed to regain ground despite the Fed’s hawkish rhetoric and rising US Treasury yields. After the steepest drop in two weeks, the greenback was barely able to recoup some of its losses amid hawkish comments made by several Fed officials. During the Asian session, it was trading steadily in the range of 105.69-106.00 ahead of the NFP report. The US dollar index rose to 105.95 versus its main rivals.

The dollar/yen pair climbed to 133.14. The yen added gains amid movements of US government bonds, geopolitical tensions over Taiwan, and fresh economic reports revealed today. Household spending in June advanced to 3.5% from -0.5% in May in annual terms, growing at the fastest pace in 5 months. Meanwhile, real wages in Japan fell by 0.4% on a yearly basis in June, declining for the third month in a row. Consumer prices are rising much faster than nominal wages. Thus, a weaker yen hurts household budgets. It is still unclear whether the Bank of Japan and the Ministry of Finance will take any action. This is why the pair is expected to fluctuate in the range of 131.30–35.60 for some time. Today, it is trading between the resistance level of 133.48 and the support level of 132.50.

The Aussie remained almost unchanged, trading at 0.6952 because of the risk-off sentiment in stock markets. It is losing steam ahead of NFP data and falling commodity prices. Many analysts believe that the RBA's less hawkish position is quite inappropriate given galloping inflation in the country. Besides, it adversely affects the Australian dollar. Today, the AUD/USD pair is moving in the price corridor of 0.6948-0.6977, which is quite predictable.


00:00 Intro
01:02 US 10-YEAR BOND YIELD/US 2-YEAR BOND YIELD
02:11 USDX
02:43 USD/JPY
03:49 AUD/USD
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