FX.co ★ Dynamics of the 2-year Treasury yield shows growth in expectations of an earlier change in the Fed's monetary policy

The expectation of an earlier change in the Fed's monetary policy amid strong inflation growth in recent months and the consequences of the regulator's monetary policy meeting has already led to a fall in world stock indexes and an increase in the US dollar.

Everything that is happening in the markets can be described as a likely, if not the beginning of a change in the long-term upward trend, then so far, as a serious downward correction. The main reason for this is still the continuous doubts that the promise of the Fed not to take any measures to change the monetary rate not only this year but also next year will not be implemented.

The high probability that the Fed will have to either hint about the beginning of the reduction of the volume of government bond purchases or directly announce it if inflation does not stabilize or does not show at least a slight decline in September, which is very doubtful, contributes to investors' closure of a number of positions in the stock markets. Thus, it leads to a decline in stock indices, where shares of companies are calculated sensitively to the prospects for economic growth.

We believe that the continuation of such sentiments will lead to a further correction in the stock markets, primarily in the US, which may turn into a full-fledged change of the bullish trend to a bearish one.

As for the dynamics of the US dollar, its growth rate will also be limited. There are no stable and clear dynamics of profitability in the Treasury market. It is worth noting that the yield of the two-year period has sharply risen from the level of 0.15% to 0.266% in recent days. However, these securities are quite sensitive to the prospects of changes in the rate of the Fed's monetary policy. The rising yields indicate an increase in these expectations. At the same time, the yield of the benchmark 10-year T-Note is declining and was below 1.40% earlier.

Based on the dynamics of the ICE dollar index, the US dollar made a slight downward correction before the opening of trading in Europe. This is after a strong growth on expectations of an earlier monetary policy change, and results of the Fed meeting. But in general, its strengthening is not yet over. The index may still grow to 93.47 points, which was the local high at the beginning of April 2021.

Overall, we believe that it will locally strengthen in the near future and a lot will depend on the situation in the government debt market. If bond yields begin to rise together, then the US dollar rate will also increase.

Forecast of the day:

The EUR/USD pair found support at the level of 1.1845. An upward correction is very possible. We believe it is possible to sell the pair on growth, approximately from the level of 1.1915 with a local target of 1.1800.

The AUD/USD pair is consolidating above the level of 0.7475. It will most likely further decline amid falling commodity prices and demand for company shares. If the price declines below the level of 0.7474, it will continue to go down to 0.7400.