Dollar and Yield Rose on Fed Tapering Expectations

Dollar strengthened overnight as markets are starting to build a consensus that Fed will taper the bond purchase in September.

 

According to a Bloomberg survey, 65% of economists expected Fed to reduce the $85b per month bond buying. The expectation was also reflected in treasury yields which saw 10 year yields jumped to close at 2.715%, just shy of 2013 high of 2.737%. 30 year yield also rose sharply to close at 3.756%, just shy of 2013 high of 3.792%. Dollar index rose to as high as 81.879 overnight too.

 

However, note that the dollar index is still limited well below 82.49 resistance and there is no confirmation of reversal yet. Focus will remain on whether dollar could extend the rally during the second half of the month.

 

EUR/GBP spiked lower to as low as 0.8354 last week but quickly recovered back to above 0.8580. Main focus will be on UK job data and BoE minutes today. BoE pledged last week to keep monetary policy accommodative until unemployment rate drops to 7%.

 

Also, BoE inflation report showed projection that unemployment rate won't break drop below 7% level at least until 2016. Any present surprise in employment data would prompt speculation that BoE would normalize policies sooner.

 

Other focus today include Q2 GDP data from France and Germany, as well as Eurozone. French GDP is expected to grow 0.2% qoq, German GDP is expected to rise healthily at 0.6%. Eurozone as a whole is expected to pull out of recession with GDP growing at 0.2% qoq.