Daily Currency Update

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Why bond markets impact currency

USD - United States Dollar

Since February 25 the US Dollar Index has gained more than one a half percent while equity markets have bounced between highs and lows. The index, which measures the value of the dollar against its major trading pairs like the euro, pound and Canadian dollar, has traded above 90 since that date.

During that time, commentators have discussed an increasingly higher valued bond market. So what’s that mean and what’s that do for the US dollar?

If demand for bonds increase, its usually driven by investors exiting the stock market. At the same time, when investors exit the stock market, they seek cash, or the US dollar. As we’ve seen for the last 12 months, when the equity markets wobble, demand for the US dollar increases. However, over the last few days, we’ve seen demand for bonds increase while the US dollar has maintained steady. As you see today, the US dollar has maintained its value while bonds continue to climb.

Key Movers

EURUSD again dropped towards the 1.20 handle as equity markets around the world show a mixed picture of losses and gains. The euro managed to fend off a play to break below 1.20 earlier this week so it will be interesting to see if the key level can be held again given the backdrop of the slow vaccine roll out from the EU.

Yesterday UK Chancellor of the Exchequer Rishi Sunak unveiled the latest budget. It continued spending to support and rebuild an economy reeling from the coronavirus pandemic. Some of the main measures included an extension to the job furlough scheme through to September; a six-month extension to the £20 increase in Universal Credit; support for the self-employed extended through to September, and a rise in the minimum wage to £8.91. GBP was little moved by the Budget as most of the main details had been revealed beforehand, so GBPUSD continued to trade between 1.39 and 1.40. GBPEUR is also within recent ranges trading at 1.1580.

Attentions returned to price action across bond markets overnight with rates again showing significant gains prompting a sell off across equities and a broader risk-off shift. Having touched intraday highs at 0.7840 on the back of a strong Q4 GDP print, the AUD drifted back below 0.78 US cents as UK bonds let rates drift higher following a larger than expected debt issuance. Elevated rates again prompted investors to adopt a measured approach as a cautious tone permeated markets and forced the AUD toward intraday lows at 0.7775. Having edged upward into this morning’s open, the AUD currently buys 0.7790 US cents.

Expected Ranges

EUR/USD: 1.202 - 1.207 ▲

GBP/USD: 1.392 - 1.401 ▼

AUD/USD: 0.775 - 0.781 ▲

USD/CAD: 1.257 - 1.267 ▼