A more hawkish tone from both the ECB and the Fed last week caught markets off guard

• The dollar was boosted yesterday by a climb in Treasury yields to multi-year peaks
• Traders wait on U.S inflation data this week for clues on the pace of Fed policy tightening
• The euro continued to retreat from near a three-month high to Japan's currency
• ECB President earlier this week tapped down expectations of aggressive interest rate hikes

The dollar touched a one-month high versus the yen today, boosted by a climb in Treasury yields to multi-year peaks overnight as traders wait on U.S. inflation data this week for clues on the pace of Federal Reserve policy tightening. 

The euro continued to retreat from near a three-month high to Japan's currency after European Central Bank President Christine Lagarde earlier this week tapped down expectations of aggressive interest rate hikes. A more hawkish tone from both the ECB and the Fed last week caught markets off guard and sent yields soaring on the eurozone and U.S. debt in anticipation rates could rise faster and higher than previously expected. 

Economic Calendar

The dollar rose at one point in early Asian trading to 115.69 yen, the highest since Jan. 10, before pulling back to last trade 0.08% lower at 115.43. The 10-year Treasury yield surged as high as 1.97% on Tuesday for the first time since Nov. 2019. The yield on the two-year note, which is more sensitive to interest rate expectations, reached 1.347 for the first time since February 2020. 

Markets are pricing in more than a 70% chance of a 25 basis point hike and a nearly 30% chance for a 50 basis point hike when U.S. policymakers meet in March, according to CME's Fed Watch Tool. High U.S inflation may go even higher before getting better, San Francisco Fed President Mary Daly said on Tuesday. 

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Consumer prices probably climbed 7.3% year-over-year in January, economists polled by Reuters predict U.S data will show on Thursday. The dollar index, which gauges the greenback against six major peers, edged 0.02% higher to 95.614, after bouncing off a 2-1/2-week low of 95.136 reached Friday. It touched the highest since June 2020 at 97.441 at the end of last month. 

The dollar index is in a holding pattern while markets weigh up the prospect of an abrupt Fed policy tightening against the ECB's hawkish backflip. Although a more hawkish ECB will keep a lid on dollar gains near-term, the dollar's medium-term bull trend is still intact, and the dollar index is a buy-on dip to the low 95 levels. 

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The ECB's Lagarde said on Monday there was no need for extensive tightening, trying to temper rising expectations for aggressive action after she last week opened the door a crack to a potential rate rise this year. The euro was about flat at $1.1420, following its gradual retreat from a peak of $1.1483 on Friday, which matched the highest level in almost three months.

Euro

The single currency weakened in yesterday’s session after European Central Bank President Christine Lagarde tried to rein in interest rate hike expectations that lifted the currency to a three-week-high last week. The ECB's hawkish twist last week took markets by surprise and sent yields on peripheral eurozone debt surging. Overall, the EUR/USD traded with a low of 1.1413 and a high of 1.1461 before closing the day around 1.1441 in the New York session.

Yen

The Japanese Yen fell as the dollar was boosted by a climb in Treasury yields to multi-year peaks overnight as traders wait on U.S inflation data this week for clues on the pace of Federal Reserve policy tightening. Markets are pricing in more than a 70% chance of a 25 basis point hike and a nearly 30% chance for a 50 basis point hike when U.S policymakers meet in March. Overall, the USD/JPY traded with a low of 114.89 and a high of 115.36 before closing the day around 115.09 in the U.S session.

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British Pound

The British Pound gained versus the euro for a second consecutive day, pulling back from a 1-1/2 month low hit on Monday as investors judged that any monetary tightening by the European Central Bank will significantly lag its British counterpart in the near term. We’re still of the view that in six months’ time, UK rates will be in positive territory. Overall, the GBP/USD traded with a low of 1.3488 and a high of 1.3549 before closing the day at 1.3534 in the New York session.

Canadian Dollar

The Canadian Dollar weakened against its U.S counterpart, giving back some of the previous day's sharp gains, as oil prices fell and domestic data showed a surprise trade deficit. Some of that weakness has been attributed to the pullback we're seeing with crude prices. The relentless rally with oil it seems to be showing some exhaustion. Overall, USD/CAD traded with a low of 1.2655 and a high of 1.2754 before closing the day at 1.2664 in the New York session.

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Australian Dollar

The Australian Dollar inched higher today as global markets priced in the risk of a more drastic tightening by central banks, sending local bond yields to three-year peaks. Markets have likewise moved to price in more moves by the Reserve Bank of Australia (RBA), after the central bank conceded a rate rise could come late next year if the economy continued to surprise on the upside. Overall, AUD/USD traded with a low of 0.7169 and a high of 0.7228 before closing the day at 0.7171 in the New York session.

Euro-Yen

EUR/JPY is trading below 14, 50 and 100 days moving average. Fast stochastic is giving a bearish tone and MACD is also issuing a bearish stance. The Relative Strength Index is above 41 and lies below the neutral zone. In general, the pair has lost 0.15%.

Sterling-Yen

Currently, GBP/JPY is trading below 14 and above 50, 100 days moving average. Fast stochastic is issuing a bearish tone and MACD is also indicating a bearish stance. The Relative Strength Index is above 45 reading and lies below the neutral zone. On the whole, the pair has lost 0.01%.

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Aussie-Yen

Currently, the cross is trading above 14, 50 and below 100 days moving average. Fast stochastic is giving a bearish tone and MACD is also indicating a bearish stance. The Relative Strength Index is above 43 reading and lies below the neutral region. In general, the pair has gained 0.63%.

Euro-Sterling

This cross is currently trading below 14, 50 and below 100 days moving average. Fast stochastic is indicating a bullish tone and MACD is also issuing a bullish signal. The Relative Strength Index is above 44 and lies above the neutral region. Overall, the pair has lost 0.17%.

Sterling-Swiss

This cross is trading above 14, 50 and 100 days moving average. Fast stochastic is issuing a bearish stance and MACD is also indicating a bearish tone. The Relative Strength Index is above 46 and lies above the neutral region. In general, the pair has lost 0.14%.

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