FX Update: Fed priced to reach 5.00%. USD consolidation time? FX Update: Fed priced to reach 5.00%. USD consolidation time? FX Update: Fed priced to reach 5.00%. USD consolidation time?

FX Update: Fed priced to reach 5.00%. USD consolidation time?

John Hardy

Head of FX Strategy

Summary:  US treasury yields set a new cycle high today all along the curve before retreating in today’s European session. USDJPY tested above 150.00 for about 60 seconds today before getting beaten back lower. While higher yields should continue to support the US dollar, it is hard to argue that yields will simply continue to rally in a straight line. Some technical signs of exhaustion are creeping into several USD pairs as well. If yields consolidate now that Fed Funds is fully priced to reach a 5% Fed funds rate, risk sentiment may do likewise and we could be set for a spell of USD consolidation. If not, market volatility can only rise.

FX Trading focus: Higher US treasury yields not driving much USD strength – just about the 150 USDJPY “barrier” or a sign of USD exhaustion?

The Bank of Japan felt forced to announce an unscheduled bond-buying operation to defend the 0.25% cap on the 10-year JGB after that level was violated overnight. Meanwhile, US yields posted strong new highs yesterday near 4.15%, a move that spilled higher still in early trading today to nearly 4.18% before settling several basis points lower. The move comes as USDJPY pressed on the 150.00 level in USDJPY, managing to spill over that level for around a minute before it was bashed back below – no word on whether this was official intervention that I can see. Could the Bank of Japan take the SNB approach of defending a specific level?

With the early 2023 Fed expectations hitting 5.0% (March FOMC meeting priced at 4.99% as of this writing after yields have retreated a few basis points from intraday highs), I wonder if the JPY could catch a break for a spell here – at least from the pressure of seemingly ever-rising US yields. Whether USDJPY specifically has found a peak here, a temporary peak in US treasury yields would certainly take some of the steam out of the broad upside pressure on the greenback.

The generally downbeat Fed beige book last night also encourages the notion that the market may have reached “peak Fed expectations” in pricing near certainty of a 75 basis points hike at the FOMC meeting on November 22 and strong odds of another 75 basis points at the December meeting that would take the Fed funds rate to 4.50-4.75%, less than fifty basis points from the big 5.0% rate. Yes, the Fed has made it clear that it anticipates that it will continue to hike next year even as the labor market weakens – if only to 4.4%. A rise of 0.5% in the unemployment rate could already mean the US is in recession, while a recent paper from the San Francisco Fed estimates that the unemployment rate needed to slow inflation (NAIRU) is perhaps 6.0%, far above what the Fed forecasts suggest (And making for a very ugly outlook for markets if this is the case).

So, we know the bar is high for the Fed to actually lower rate expectations, but the bar is also high for the market to take Fed expectations higher from here as long unless wage/core inflation data continue to surprise to the upside for another couple of cycles. Even a sideways trajectory in yields could bring a bit of USD consolidation, as long as risk sentiment also finds cheer on that development and earnings season (hitting full stride next week) doesn’t surprise too negatively. It’s tough to measure how much worse things need to get to move the needle when sentiment is already terrible.

The Aussie has traded weakly as commodity prices have lost their way and the RBA has turned a bit more dovish, expected to only deliver 25 basis point moves at its monthly (no meeting in Jan.) meetings from here, with soft payrolls growth data overnight encouraging that notion (caution, it’s a very choppy data series). The 2-year AU-US yield differential is at record lows of over 100 basis points. Yield differentials don’t have to prove an important driver, especially in timing terms, but as Fed expectations have been a key driver of USD strength for this cycle, a period of consolidation may set in if we have reached “peak Fed expectations” for now – especially in relative terms, as the RBA/Fed differential is currently priced at near -150 basis points by March of next year, only to tighten a bit more thereafter. That view looks stretched. As for the technical situation, not much to discourage the bears yet, but we’ve seen some choppy price action after multiple tests lower. A break above the descending trend channel and through the 0.6350-0.400 area needed to suggest a larger scale back-up to at least 0.6500 and possibly 0.6600+. All of that would need for US yields to take a breather. If US yields continue higher at anything resembling their recent pace for much longer, we are likely headed toward a liquidity crisis somewhere in global market after another aggravated rise in the US dollar.

Source: Saxo Group

A much hotter than expected Canadian CPI number yesterday took short Canadian rates to new highs, and unlike the RBA the BoC is on track to match Fed rate hikes – USDCAD looks much like an inverse AUDUSD – heavy here on a further drop.

As I am finishing off this update, UK PM Liz Truss is out announcing her resignation, to stay in office until a successor if found. It was a very short statement from the shortest serving Prime Minister in UK history. The UK is in a real pickle. Sterling tried to rally – but there is no quick path out of the ugly situation the UK finds itself in, and certainly no guarantee that a successor can come up with anything new. The UK needs cheaper energy, higher productivity and to either attract capital or produce more for export.

Table: FX Board of G10 and CNH trend evolution and strength.
Watching the USD for signs of more negative momentum building ahead of a possible turnover… it’s not a done deal, just a scenario.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
The tease higher in EURCHF becoming more pronounced here – just no momentum yet. Elsewhere, watching the status of many USD pairs, which are in tactical limbo, including EURUSD, GBPUSD, AUDUSD and USDCAD, while the market is extremely nervous around the 150.00 level in USDJPY.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1400 – US Sep. Existing Home Sales
  • 1400 – US Sep. Leading Index
  • 2145 – New Zealand Sep. Trade Balance
  • 2301 – UK Oct. GfK Consumer Confidence
  • 2330 – Japan Sep. National CPI

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article


The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.