USD Strengthens, Yields Soar Amid Hawkish Fed Speech

US equities whipsawed yesterday and ended mostly flat, erasing their opening gains, while commodities remained pressured due to negative sentiment.

Fed remains committed

The US dollar surged higher yesterday, along with US yields, following official statements from several US Federal Reserve governors. Charles Evans of the Chicago Fed stated that inflationary pressures may be spreading out and that the unemployment rate may rise to about 4.25 percent. Still, he thought raising interest rates by 50 basis points would be appropriate in September. 

On the other hand, Loretta Mester asserted that she does not believe the nation is experiencing a recession and noted that the labor market is in excellent form. However, she pointed out inflation has not “at all” dropped.

As a result, the EURUSD pair dropped more than 100 pips, while US bond yields erased last week’s losses. Moreover, The current yield on a 10-year Treasury note is 2.715%, while the yield on a 2-year note has increased to 3.05%. Since 2000, the yield curve has never been more inverted.

Taiwan tensions continue

Investors’ concerns over US House of Representatives Speaker Nancy Pelosi’s trip to Taiwan, which might further deteriorate Sino-US ties and heighten political tensions in Asia, led to a worsening sentiment on Tuesday.

Given that Pelosi is the highest-ranking US politician to visit the island in 25 years, Beijing fiercely opposes the visit and asserts ownership of the island.

At a press conference earlier in the day, Pelosi stated, “We want Taiwan to always have freedom with security, and we are not backing away from that”

However, so far, there has not been any military response by China’s army, likely leading to a relief rally in risk assets on Wednesday.

Later today, EU retail sales for June are due, expected to decline from 0.2% to -1.7% yearly, while the PPI inflation will also be released, likely staying above 35% (WAU).

During the US session, the Services ISM for July will be released, projected to decline to 53.5. In addition, factory orders and EIA crude oil stocks change are also on the agenda.