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US Treasury yields slide as investors fear COVID surge

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12 July 2021

Written by
Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

It was a relatively quiet week in G10 currency markets, but the real action was elsewhere.

T
he correction in US government yields gathered pace on fresh concerns about the impact of new COVID variants on growth, and peaked on Wednesday on what looked like a buying panic that subsided later the week. This volatility did not have much effect elsewhere, though COVID fears hit Latin American currencies particularly hard.

The key data point this week, in our view, will be the US inflation report for June out Tuesday. The headline reading is expected to remain around 5%, with the core measure set to rise to 4%. The level of Treasury yields clearly implies that these very high readings are due to come down soon, but we are less confident. Fed Chair Powell’s semiannual testimony to Congress on Wednesday and Thursday will take place after the inflation report is released, and should be the other focal point for markets.

GBP

UK GDP growth for May was a bit on the soft side, but markets did not react much to this lagging data point. More timely was the decision to press with reopening measures 19th July, despite sharply rising new virus cases, which bodes well for sterling in the coming months.

This week, we will be paying close attention to the inflation report on Wednesday. An upward surprise could bring into focus the possibility of an earlier than expected tightening of monetary policy, which would be positive for the pound.

EUR

Revisions to the preliminary June PMIs mostly reinforced our optimistic view of the European economic recovery. Another important development was the strategic review of ECB policy, which now claims to have a symmetrical inflation target around 2%. What this entails for practical policy making remains to be fleshed out, however, and the announcement had little market impact.

There is little of note in the calendar this week, so expect the euro to trade off events in the US, particularly inflation for June and Fed Chair Powell’s testimony to Congress.

USD

The sharp moves in the Treasury market dominated headlines in a week with little market-moving data. The recovery in yields in the latter half of the week suggests that the moves had more to do with positioning squaring and short covering than a fundamental rethink of the macroeconomic outlook.

All eyes will now be on the inflation report on Tuesday. Economists are not expecting any significant let up in inflationary pressures that have resulted in the highest inflation levels in decades yet. We see an increasing disconnect between the reality of inflation prints and the very low rates availing in government debt throughout the developed world.

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