Will the US Dollar Keep Rising Beyond Its Highest Point in 10 Weeks Against Major Currencies?

This comes as investors eagerly await Jay Powell’s speech at the Jackson Hole conference. Moreover, US Treasury yields have reached their highest level in 16 years, driven by investor expectations of continued interest rate hikes due to the economy displaying no indications of slowing down.

The US Dollar Index Is Up for 6 Consecutive Weeks

Commencing in June 2021, the US dollar index has maintained a steady upward trajectory, demonstrating substantial growth. It has advanced by more than 25% from that date until the end of September 2021, surging from 89.41 to 114.815.

Following this peak, the US dollar index has experienced a decline, recently reaching the 61.8% Fibonacci retracement level of the initial rise in the early part of the current month, as depicted on the weekly chart. Since this level, the US dollar has been up for 6 consecutive weeks.

The Sell-off in US Government Debt Is Slowing Down Ahead of Jackson Hole

As reported by the Financial Times, the ongoing sell-off in US government bonds persisted on Monday. Yields on benchmark Treasuries reached a 16-year peak, propelled by the economy’s unyielding strength.

Robust economic indicators observed over the summer have prompted uncertainty about the Federal Reserve’s likelihood of initiating rate cuts in the near term – this uncertainty has been a key driver of the bond market’s decline.

The yield on the 10-year note surged by up to 0.1 percentage points, reaching 4.35% on Monday, which exceeded a previous peak in October and marked its highest level since November 2007.

This dynamic reflects the inverse relationship between bond prices and yields – when yields rise, bond prices fall.

The strong economy raises expectations that the Federal Reserve might refrain from implementing rate cuts, as higher interest rates may be needed to curb inflation that is still above target, even if it remains moderate (annual CPI at 3.2% in July) thanks to high interest rates in the country.

So with high inflation and a resilient economy, investors expect the Fed to keep tightening the US monetary policy. When interest rates rise or are expected to keep rising, investors tend to sell existing bonds with lower coupon rates, causing their prices to fall and their yields to rise. This selling pressure is a response to the desire to capture higher yields available in the market due to the increased interest rates.

Jackson Hole Should Offer Some Answers to Investors

The 46th annual Economic Policy Symposium, hosted by the Federal Reserve Bank of Kansas City, is taking place from August 24th to 26th in Jackson Hole, Wyoming. Since its inception in 1978, this symposium has been a platform for discussing crucial economic matters.

This year’s theme, “Structural Shifts in the Global Economy,” will engage experts from various fields to discuss significant enduring changes influencing the global economy, while the disruption of the pandemic is fading.

Despite the recent dip in US inflation, investors are still cautious ahead of the annual gathering about upcoming steps from the FOMC, as they’re expecting to have a clearer view about whether or not the Fed is really ready to pause its tightening cycle. This insight is crucial for investors to adjust their strategies accordingly, as it will impact market sentiment, risk appetite, and asset allocation decisions.

As some investors consider the potential for upcoming rate cuts, the FOMC’s stance seems inclined towards a “higher-for-longer” outlook on interest rates. This approach aims to determine the duration for which the Federal Reserve will uphold elevated interest rates and to pinpoint the recently established neutral interest rate.

This neutral rate neither fosters nor impedes economic growth, raising interest in its determination within the present financial scenario. Powell’s statements could suggest that this rate is now higher than previously believed, adding to the intrigue surrounding the matter.

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