The US dollar continued to rally amid Fed Chairman Jerome Powell's speech yesterday. He talked about the course of monetary policy in the US and the ongoing economic recovery. During his speech, Powell pointed out a slight decrease in Treasuries, as well as a jump in 10-year bonds to 1.550%. And according to the latest data, this is the highest level reached in more than a year.

Powell also mentioned that the reopening of the US economy could spike inflation. However, he reiterated that the Fed does not yet have any plans to change the current monetary policy.

"We expect inflation to jump as soon as the economy reopens and recovers," Powell said.

But an initial rise in inflation will only be temporary. According to the Fed Chairman, it will take much longer for inflation to grow more significantly. Therefore, the central bank plans to keep interest rates near zero, at least until inflation reaches 2.0% or above.

In terms of bonds, the recent spike in yields has caught Powell's attention, as the turmoil in the markets threatens the Fed's goals. Nevertheless, he did not signal that the central bank will ramp up its bond buying program, which would quickly reduce Treasury yields.

As for the euro area, the situation in the bond market is less optimistic. The European Central Bank decided to increase the pace of its bond buying program in order to counteract the rise in Treasury yields. However, this could hurt the growth prospects of the EU economy.

According to Bloomberg poll, more than half of respondents said they expect the central bank to extend its €1.85 trillion bond purchase program beyond March 2022. At the same time, almost no one is betting that the ECB will increase the volume of its weekly bond purchases in the near future. But most of them believe that the recent market movements have not yet fundamentally changed the economic outlook for the eurozone.

In any case, the active growth of bond yields led to the same active strengthening of the US dollar. In fact, EUR/USD has already fallen to new lows and is currently trading at 1.1950. In that regard, a break below 1.1950 will surely push the price even lower towards 1.1920 and 1.1880, or perhaps to the area of 18. But if the quote returns to 1.2000, EUR/USD could climb again to 1.2050 and 1.2120.

With regards to macroeconomic statistics, the US Labor Department published a report yesterday that indicated a slight improvement in the US labor market. The latest data showed that initial jobless claims have jumped to 745,000, which is only 9,000 higher compared to the numbers recorded last week. Economists had expected the indicator to rise to 750,000.

Today, another report on the US labor market will be released, but this time it will be on the number of employees in the non-agricultural sector. Overall unemployment rate in the US will also be revealed. Of course, these data could seriously affect the US dollar, especially if the figures come out worse than expected.

At the same time, closer to the middle of the US trading session, Treasury Secretary Janet Yellen will give a speech, and she may try to influence the situation by discussing the ongoing growth in US Treasury yields.

But going back to the labor market, productivity in the US has declined by 4.2% in the fourth quarter of 2020. Economists had expected the index to drop by 4.7%.

Meanwhile, an increase in new orders for manufactured goods was observed. In particular, by 2.6% in January 2021. Economists had expected the index to rise by only 2.1%.

In the EU, Germany will release a report on its production orders today, which are forecast to rise to 0.7% month-on-month. Then, Italy will publish data on its retail sales for January. But these reports are unlikely to seriously affect the market, as the US dollar will most probably continue rallying amid strong data on the US labor market.

On the GBP/USD pair, the breakout of the 1.3860 level will lead to a rather large sell-off in the market, which will result in a sharp drop towards 1.3770 and 1.3680. But if the quote returns above the 40th area, the pound may climb towards 1.4115 and 1.4240.