Yields rise on hawkish FOMC outlook, dollar regathers strength

The dollar suffered losses against its major rivals during the first half of the day on Wednesday but made a sharp U-turn in the late American session on surging US Treasury bond yields. The US Dollar Index continues to edge higher in the early European session on Thursday as investors assess the FOMC’s December meeting minutes. Germany’s Destatis will release the preliminary December inflation data. Later in the day, the weekly Initial Jobless Claims, November Goods Trade Balance and December ISM Services PMI will be featured in the US economic docket.

The minutes of the FOMC’s December policy meeting revealed on Wednesday that policymakers expect the balance sheet normalization to start sooner after the first rate hike than last time. “Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate,” the publication read. With the initial market reaction, the benchmark 10-year US Treasury bond yield jumped to its strongest level since March before continuing to push higher toward 1.75% early Thursday.

The CME Group FedWatch Tool shows that markets are pricing a 68% probability of a 25 basis points rate hike in March. The hawkish policy outlook weighed heavily on US stock markets and the S&P 500 lost nearly 2% on Wednesday. Moreover, the S&P Futures were down 0.5% at the time of press, suggesting that stocks selloff could continue after the opening bell.

EUR/USD erased a large portion of its daily gains in the second half of the day on Wednesday and was last seen testing 1.1300. Eurostat will release the November Producer Price Index data but investors are likely to remain focused on US Treasury bond yields.

GBP/USD touched its highest level in nearly two months at 1.3600 late Wednesday but reversed its direction. As of writing, the pair was trading in the negative territory below 1.3550.

USD/JPY capitalized on rising yields and close above 116.00 on Wednesday. The risk-averse market environment is helping the JPY show some resilience against the dollar and the pair is posting small losses below 116.00 early Thursday.

Gold rose toward $1,830 ahead of the FOMC Minutes but ended up closing the day in the red at $1,809 pressured by surging US T-bond yields. XAU/USD remains on the back foot and continues to edge lower toward $1,800.

The bearish pressure surrounding Bitcoin has strengthened after the FOMC’s publication and BTC was last seen trading at its weakest level in a month at $43,000. Ethereum continues to fall after losing more than 6% on Wednesday and trades below $3,500 for the first time since mid-October.

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