With bond yields breaking out to multi-month highs, this should be resulting in a stronger US dollar (USD). However, at least for the time being this is not happening. The driving force behind yields moving higher is elevated inflation fears and this means that the USD is struggling. However, it is still likely that this near term blip for USD will be temporary and the gains will resume in due course. 

  • Inflation fears are driving yields higher, hampering the USD bull run. 
  • Inflation showing in rising oil prices. The higher this goes, the more that inflation fears will run US bond yields.
  • Room for further EUR/USD downside in due course

The drivers of bond yields are restricting the USD rally

The US 10 year yield has broken out above 1.61%. Bond markets are shut in the US today (for Columbus Day), so this move came on Friday. This was a Nonfarm Payrolls Friday, where the headline jobs number was rather disappointing. Not the environment for a breakout on yields, you would assume.

However, yields are moving higher not because of economic strength, but due to inflation fears. The chart of US 10 year Breakeven Inflation has broken out to the highest since May. This move covers almost all of the rising in the US 10 year Treasury yield. We can therefore see that “real” yields (bond yields minus inflation) have gone nowhere in the past week or so.

It is interesting to see that the USD has also gone nowhere. The Dollar Index has consolidated in the past week or so. There is still a strong positive correlation between real yields and USD.

Looking at the technicals of the Dollar Index, it is still likely that this is a near term consolidation before resuming higher towards 94.50/94.75. However, for now, this consolidation may result in breaching the four-week uptrend.

Oil price again at multi-year highs keeps inflation fears elevated

Fears of inflation are reflected in the oil price, which is at three-year highs again today. Brent Crude rising fast acts as a significant strain on business closes and is inflationary. The chart shows Brent Crude oil is within touching distance of its $86.95 crucial peak from September 2018. 

From a technical perspective, the 21 day moving average is a strong gauge. The price is trading over +7% above the moving average, which reflects the strength of the trend but could begin to suggest that the market is looking stretched (although Bollinger Band analysis does not suggest the market is too stretched yet).

For now, we believe that a test of $86.95 on Brent Crude is perfectly possible on a near term basis. This should help to fuel the recent inflation fears.

Any near term strength on EUR/USD still looks a chance to sell

The inflationary fears that we have seen building again in recent weeks, could still have further to run (certainly if the oil price continues higher). This may see the USD struggle for positive traction. Interestingly, we are seeing AUD/USD breaking higher today (helping by higher base metals prices) and 

However, a threatening GBP/USD has rolled over, and EUR/USD is not picking up either, whilst USD/JPY has broken out to multi-year highs. The buying pressure on EUR (and perhaps to a lesser extent on GBP) has not been sustainable. The trend of a stronger USD will still likely prevail even if inflation fears run higher.

EUR/USD has an entrenched negative medium-term outlook now. Momentum indicators and moving averages are negatively configured. We see any near term rallies that begin to falter again in the band 1.1560/1.1640 will be a chance to sell.

For GBP/USD, the intraday failure of the upside rally attempt this morning once more reflects the difficultly the Cable bulls are finding the market right now. We cannot rule out another attempt at a recovery, but we look for near term rallies failing under the 1.3730 resistance and around the four-month downtrend. All of this would be a chance to sell again.


We have seen some uncertainty in the USD rally in recent weeks. Rising inflation fears seem to be the main factor in this. Whilst this may continue for the near term, we expect that the medium-term USD positive trend will continue and further gains will be seen.