Turbulence in US Treasury Bonds Sends Ripples Across Markets

The new week has kicked off with an unexpected twist for US long-term Treasury bond holders. Amidst a fresh sell-off on Monday, yields on 10-year Treasury bonds surged past 4.5%, setting a new high. Short-term bonds, however, didn't experience the same level of pressure, with the yield on two-year bonds retreating slightly from its recent peak of 5.20% to stand at 5.12%:The market is still digesting the Federal Open Market Committee's (FOMC) signal from last week, indicating no plans for four rate cuts in 2024, only two at most. However, the forecast for another rate hike by year-end remains unchanged. This explains the asymmetric reaction in both short and long-term Treasury bonds – investors seem willing to hold onto short-term bonds, while long-term bonds are being heavily sold off, as “higher for longer” rates signal makes investments in series of short-term bonds a more attractive investment option.These developments have repercussions for both the currency and stock markets. European currencies and the yen are weakening against the dollar, with the US Dollar Index attempting to consolidate above the 106 level. EURUSD, in line with our previous analysis, continues to chart a bearish path, with a good chance of retesting the lower boundary, likely around 1.0550:As previously noted, major players are likely to wait for the 1.05 level (annual minimum) before attempting to bet on a reversal. The market is steadily moving towards that point. It's worth noting that there are no major US reports scheduled this week that could cast doubt on the hawkish signals from the Federal Reserve. Thursday will bring the Core PCE inflation report, but as it comes after the CPI report, it carries less information that is not priced in. An exception in terms of market impact would be a significant deviation from the forecast. In this case, with a Core PCE forecast of 3.9%, the actual figure would need to be 3.5% or lower to truly shake up the dollar market. Wednesday will also see the final estimate for US GDP in the second quarter (forecast at 2.2%) and initial jobless claims. It's worth recalling that last week they hit a multi-week low at 201K, further justifying the Federal Reserve's hawkish stance.Turning to European macroeconomics, Wednesday will bring inflation data for Germany, followed by Eurozone-wide data on Thursday. However, given the negative market reaction to the ECB meeting, where EURUSD fell despite the ECB's 25-basis-point rate hike and the prospect of further increases, it's clear that the market is currently pricing in the risk of stagflation in the EU – a period of high inflation coupled with weak real economic growth. So, even if inflation reports show acceleration, it will only harm the euro, as the market will indeed expect additional tightening by the ECB, which will only add further strain to the economy, as real economic growth remains sluggish. Overall, the risks for the European currency this week seem to be tilted to the downside.It's quite likely that we'll witness a short-term break below 1.05 in EURUSD this week, followed by a period of consolidation. Any trades around that level should be done with caution and it’s wise to look for entry points on the long side when there's clear aggressive bearish momentum, which will likely be followed by fundamental information later, justifying the U-turn. Among other drivers for the euro and European currencies in general, it's important to keep an eye on oil prices, which are currently consolidating, thus easing pressure on the Euro. This suggests that we may be approaching the speculative phase that marks the end of the current bearish trend in EURUSD.