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The U.S. dollar and US Treasury yields continued their upward trajectory yesterday. Ten-year yields moved above 3.11% with $EURUSD under 118 and $USDJPY over 110.50. With sizeable positioning now on any comments on monetary policy from the Fed will be played off.

Fed Rate Hikes in 2018

The rise in US Treasury yields this week is reflecting rising expectations of multiple interest rate hikes from the FOMC. The uncertainty geopolitically has not filtered into US bonds, a reflection of the large long trade being pressured.

Many of these moves become wishful thinking, for bond shorts the hope is self fulfilling. The Fed futures market has pushed out to a 40% probability of four US rate hikes in 2018. How much of that is wishful thinking?

With regards to inflation the outlier has been energy prices, does the Fed allow for that, or go a step further and say the rise in oil and gasoline prices is a rate hike in itself?

UPDATE Goldman Sachs Issued Technical Picture of US 10 Year Note May 21 2018

U.S. 10-year yields have reached the target for a 3rd of 5-waves from September 3.088% 

  • It’s also reached the extended target for wave v of 3 at 3.13%. Tactically speaking, there is still some risk that the pullback from current levels is corrective/counter-trend. That might mean the market finds support near 3.057% and sees one more attempt to make new highs. 
  • Either way, the trend is mature and due to see an imminent retracement. Ultimately expecting a 4th wave which from current levels has a minimum target at 2.94% and scope to pullback as much as 2.83%. It’s important to keep in mind that 4th waves tend to be time-consuming and complex. 
  • The level to watch closely is 3.0117%; an interim high from May 9th. Any overlap with this area will increase the chances that a short-term top is now in place. 
  • View: Watch for tactical support at 3.057%. Anything lower than 3.0117% warns of a top. Opens downside risks to 2.94% and 2.83%

US Yields GS EW 5 21 18

FOMC Minutes (Wed):

With the US dollar and yields where they are and the last FOMC having been a non-press conference meeting the market will be looking for more hawkish bent from the minutes. Focus will also be on neutral rates. Fed Governor Williams has pushed back against the idea of a rising neutral rate acknowledges that the committee will most likely have to overshoot neutral at some point.

Pricing now has the Fed hiking finishing near the lower end of neutral estimates, 2.5% on Fed Funds as shown above. If the dollar contnues to rally and yields continue to rise a steeper tightening path will likely kick in unless there is a major negative event such as a stock market crash or war event.

Source: TradersCommunity; Lloyds

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