FX Analysis – Rising US yields set FX tone as USD continues to grind higher

The ongoing sell-off in the US bond market has set the tone in FX and wider risk markets on Tuesday in an otherwise very slow news day. The USD has continued to grind higher against the higher yield backdrop with the US Dollar Index (DXY) adding to Mondays gains pushing above the 106 level, tracking yields higher.

The Fed’s recent “higher for longer” statement still supporting yields, worries of a US government shutdown looming and more hawkish comments from the Fed’s Kashkari on Monday also giving a tailwind to yields and the US dollar.

EURUSD saw further declines, first breaking support at the May 31 swing low, before also dropping below the psychological 1.06 level, with the major support of the Jan/Feb/Mar lows at 1.0521 very much in play. USD strength was the main driver but also weighing on the EUR was weak world merchandise trade volumes data , the eurozone suffers from a declining trade environment, as does the Euro.

GBPUSD also continued to decline after last week’s surprise hold from the Bank of England. Ongoing USD strength, another hit to the cyclical GBP is the softening risk sentiment in global markets amid a possible US government shutdown. GBPUSD breaching the 1.22 support level and looking little in the way of technical support levels can be expected before the 1.2000/2075 area.

USDJPY stalled from its recent grind higher after climbing just shy of the 149.00 handle, another round of the familiar jawboning from Japan’s Finance Minister Suzuki holding it in place for now, JPY also helped somewhat by the weakening risk environment seeing haven flows to the Yen.