As we come into a new trading week packed with tier-one US data, the continuous stream of hawkish rhetoric from Fed speakers is helping to drive Treasury yields ever higher. The result is a strengthening US dollar (USD) across major forex. The dollar bulls have started strongly on Monday. This momentum to gather through the coming days. 

  • Higher bond yields and a “bear flattening” yield curve help to drive a stronger USD.
  • Major pairs look to take a USD positive outlook once more.

Treasury yields driving USD higher

US Treasury yields continue to climb ever higher. The US 2 year yield is seen as a gauge of the Federal Reserve’s outlook for interest rates. The yield has hit 2.40% this morning. This is now increasingly close to where the Fed sees the neutral rate (c. 2.50%).

However, although we have seen the longer-dated 10-year yield rising too, this has not been as fast as with shorter-dated yields. The 10-year yield has hit 2.50% this morning. The 10-year yield focuses more on future inflation and growth. With inflation indicators spiking higher, its rise is certainly focused on inflation fears currently.

 Look at where the yield curve sits today. The “belly” of the curve (i.e. mid-duration bonds) shows an inverted curve between 3-year to 10-year. 

US Yield Curve - today

Subsequently, we are seeing spreads increasingly narrow on the Treasury yield curve.

yield spreads

However, notice the much shorter 3-month to 10-year spread, which is widening. This is what the Fed wants us to focus on. Despite this, the 2s/10s spread is still seen as a reliable indicator for recession. If the spread goes below zero, statistically it suggests recession in the coming 18 months.

The USD performs well during this as the US economy is seen as one that is most robust and best equipped to cope in this high inflationary environment. 

A stronger USD to kick off the week

So, coming into this new week, we see bond yields higher again, and subsequently, the dollar strengthening. This is a feature across major forex.

This is evident no more so than against the Japanese yen. USD/JPY is extremely well correlated to moves on US Treasury yields. With Japanese yields going nowhere, higher US yields drive USD/JPY higher (due to interest rate differentials). USD/JPY has accelerated higher this morning, from Friday’s close around 122.00 the pair is around 124.50 today. The only resistance (albeit from May 2015) comes in at 125.85. Beyond there the pair is at levels not seen since 2002!

On a technical basis, we are looking at the 4-hour chart for signs of exhaustion. Whilst the move is stretched this morning, the momentum remains very strong. We are monitoring reaction to the 21-period moving average (c. 122.00) on the 4-hour chart, which has been an excellent gauge of support throughout this run higher. If this moving average is breached it could be a signal of correction. For now, then, we are still happy to run this pair higher.


Looking at EUR/USD, there is an ongoing USD positive outlook over the past couple of months. There was an early breach of 1.0960 support this morning and given the downtrend and the negative configuration on the daily RSI (faltering under 50) we favour a move lower to test 1.0900. It would need a rebound to close above 1.1045 resistance to suggest a turnaround may be forming.


GBP/USD has deteriorated in the past week. Failing at the resistance of overhead supply around 1.3270/1.3300 the pair has been in steady retreat again. A test of 1.3120 support is coming and a close below would suggest a retreat back towards 1.3000 is likely. With the deteriorating momentum on the RSI and decisively broken recovery uptrend, we favour downside moves now. Near term, charts show initial resistance at 1.3225.


The Aussie (along with the Kiwi) has had a positive performance in recent weeks. This is even reflected against the backdrop of a strengthening USD. However, as the Kiwi has begun to slip back in recent days, this run higher on AUD may begin to recede. AUD/USD is close to crucial resistance at 0.7555 and with the RSI close to 70, market participants may believe that it is close to the time for some profit-taking. This will be a risk in the coming days, especially if the USD continues to strengthen.


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