Hawkish Fed Undertones Emerge, Treasury Yields Soar and Dollar Gains
Last week witnessed a significant surge in US Treasury yields, driven by consecutive inflation data that highlighted the persistent nature of price pressures. Headline Consumer Price Index (CPI) climbed to 2.7%, marking a second consecutive monthly acceleration, while core CPI remained steady at 3.3%. In addition, Producer Price Index (PPI) surged to 4.7%, reaching its highest level since February 2023.
While these figures won’t deter the Federal Reserve (Fed) from implementing another 25 basis points (bps) rate cut at its upcoming meeting, they underscore the likelihood of a “hawkish cut.” Market expectations now point to the Fed signaling a pause in January and slowing the pace of rate reductions throughout 2025.
The necessity for a cautious easing path is becoming increasingly apparent as disinflation continues to show minimal improvement recently. Moreover, the specter of inflationary pressures resurfacing under the anticipated fiscal and trade policies of President-elect Donald Trump adds to the complexity of the situation, as these policies are yet to be fully detailed.
Current Market Pricing and Uncertainty
The current market pricing reflects expectations for only two additional rate cuts in 2025, bringing the federal funds rate to a range of 3.75–4.00%. This projection already exceeds the Fed’s median forecast of 3.4% for year-end 2025 released in September. This shift signifies a departure from the more aggressive easing cycle anticipated back in September. The market’s uncertainty is palpable, with approximately a third of participants expecting fewer cuts and another third expecting more, underscoring the ambiguity surrounding the economic outlook.
Technical Analysis and Market Trends
Technically, the recent surge in 10-year Treasury yields suggests that the corrective dip to 4.126 was a false break of the 55-Day Exponential Moving Average (EMA). This development indicates that the rise from 3.603 is still ongoing, with a potential retest of the 4.505 resistance level on the horizon. A significant breakthrough at this level could target the 61.8% projection from 3.603 to 4.505 from 4.126 at 4.683.
Furthermore, the strengthening support from the 55-Week EMA (currently at 4.133) solidifies the argument that the medium-term correction from 4.997 has concluded with three downward waves to 3.603. This support level suggests the possibility of resuming the upward trend towards 5.359 next year.
The Dollar Index has mirrored the rise in yields, with the recent movement indicating a potential completion of the pullback from 108.07. While a short-term corrective pattern could extend further, the likelihood of support at the 38.2% retracement level of 100.15 to 108.07 at 105.04 is increasing. A resumption of the upward trend from 100.15 towards 108.07 hinges on the performance of the 10-year yield breaching the 4.505 resistance level.
Conclusion
In conclusion, the recent inflation data and surge in Treasury yields have underscored the complex landscape facing the Federal Reserve and global markets. As the Fed navigates the delicate balance between addressing price pressures and supporting economic growth, market participants remain on edge amid uncertainty surrounding future policy actions. The interplay between inflation, interest rates, and economic policies will continue to shape the trajectory of the US Dollar and global currencies in the coming months. Stay tuned for further developments as central banks and policymakers respond to the evolving economic landscape with cautious optimism and strategic planning.
