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US treasury yields can’t keep USD momentum

USD - United States Dollar

Demand for the US dollar fell yesterday afternoon before bouncing back in overnight trading with its major trading pairs.

The US dollar fell sharply through trade on Tuesday, giving up gains across the board as investors shied away from the world’s base currency in search of higher yield returns. A widening in US treasury yields through the last 6 days was a key driver behind the recent US dollar rebound. However, the latest treasury auction saw yield prices unchanged, prompting investors to check the recent upturn. With markets assessing the momentum behind the US dollar, this correction has again pushed it toward multi-year lows and with little of note on the macroeconomic calendar our attentions remain with broader narrative, with an eye to changing yield prices as a possible tipping point for direction.

Key Movers

The euro continued to hold strong, despite many factors acting against them. Germany was the latest to tighten restrictions, with Chancellor Angel Merkel said that if they are unable to hold off the ‘UK virus’ variant, then they could see an uptick in cases by Easter up to 10 times the current rate. The euro seems to be held up by low interest rates, vaccine optimism and lack of demand for USD from global investors.

Great British pound bounced as Governor of the Bank of England Andrew Bailey suggested that negative rates may not be the best idea in the short term. Many believed Bailey would cut the UK interest rate into the negative for the first time at the next meeting on February 4. This is looking less likely. Bailey warned that negative rates would slow economic recovery unnecessarily, as it would mean there are less available funds to fuel recovery. The pound reacted well to the news, pushing GBPUSD back above the 1.36 handle. The Bank of England will most likely intervene, should they have to. However, this could be in the form of quantitative easing before a rate cut. Bailey also mentioned how he thought that the UK unemployment rate was closer to 6.5%, than the 4.9% official figure, and warns that it may get far worse in the spring once the furlough financial aid dries out. This may force his hand into a rate cut.

The Australian dollar clawed back losses through trade on Tuesday, climbing through 0.77 US cents amid broader USD selling. With little of note to drive direction through the domestic session, the AUD bounced between 0.7690 and 0.7720 as investors struggled to find a marker for direction, instead sidelining bets ahead of the North American trading day.

Expected Ranges

EUR/USD: 1.215 - 1.222 ▲

GBP/USD: 1.361 - 1.369 ▲

AUD/USD: 0.772 - 0.777 ▼

USD/CAD: 1.270 - 1.275 ▼