Higher Treasury Yields Support USD

• Treasury yields edged higher on improving US consumer confidence, hawkish Fed speak, and a weak Treasury auction.

• Eurozone April money supply data and the German May CPI print can generate modest financial market volatility today.

• Australia April CPI was hot and New Zealand’s May business survey showed a clear weakening in activity.

USD recovered slightly supported by higher US Treasury yields. Improving US consumer confidence in May and hawkish comments by Minneapolis Fed President Neel Kashkari underpinned yesterday’s increase in Treasury yields. Kashkari said he does not think anyone has taken rate hikes off the table. Lacklustre demand for Treasuries following the auctions of 2 and 5-year notes also pushed Treasury yields higher.

The Richmond Fed manufacturing and services indexes (3:00pm London) and the Dallas Fed services activity index (3:30pm London) are the domestic data highlights. The Fed Beige Book is released later today (7:00pm London). The April 17 Fed Beige Book pointed at a healthy US economic backdrop but showed that firms’ ability to pass cost increases on to consumers had weakened considerably. We expect another balanced tone in this report that will allow the Fed to take a wait and see approach with regards to easing. New York Fed President John Williams speaks today but there is no Q&A (6:45pm London).

EUR/USD retraced this week’s gains. Relative interest rate expectations remain a major EUR/USD headwind. Over the next twelve months, the swaps curve price-in almost 100bps of ECB policy rate cuts vs. 60bps of cuts for the Fed. The Eurozone’s May CPI print tomorrow will help guide ECB easing expectations beyond June. Today, Germany’s EU Harmonized CPI will offer a preview (1:00ppm London). Headline inflation is expected to pick up three ticks to 2.7% y/y in May. The Eurozone April money supply data is up next (9:00am London).

USD/JPY edged a little higher above 157.00. Bank of Japan (BOJ) Board Member Seiji Adachi reiterated the bank’s cautious policy guidance. Adachi warned “we need to absolutely avoid premature rate increases, which could throw cold water on a chance for the Japanese economy to recover”. Adachi added that if “prolonged excessive yen weakness” brings forward the timing of the inflation pick-up, “a monetary policy response would be one option”. In our view, the BOJ is unlikely to tighten more than is currently priced-in (40bps over the next 12 months) because underlying inflation in Japan is in a firm downtrend. This means Japan real yields will remain negative and a drag on JPY.

AUD/USD firmed briefly by about 0.4% and Australian bonds significantly underperformed overnight. Australia’s hot CPI print suggests the RBA will not be in a rush to loosen policy. The monthly CPI indicator unexpectedly rose 3.6% y/y in April (consensus: 3.4%) vs. 3.5% in March and core inflation remained sticky above 4%. In April, CPI excluding volatile items and holiday travel was 4.1% y/y same as in March and trimmed mean CPI was at 4.1% y/y vs. 4.0% in March.

NZD underperformed most major currencies. New Zealand’s soft May ANZ business survey reinforces swaps market expectations that the RBNZ will start cutting the policy rate earlier than they project (Q3 2025). The Own Activity Outlook index fell to a ten-month low at 11.8 vs. 14.3 in April consistent with weaker growth. And inflation indicators are easing with Cost Expectations, Pricing Intensions, and Inflation Expectations all down near multi-year lows. The swaps curve implies 65% probability of an RBNZ policy rate cut by November 2024 while a rate cut is more than fully priced-in for February 2025.