US Dollar Fundamental Outlook Hinges on Treasury Yield Volatility


  • US Dollar bears have steered the Greenback notably lower since the start of 2Q-2021
  • EUR/USD price action is rebounding higher alongside Bund to Treasury yield spreads
  • Inflation data due for release could ignite bond market volatility and US Dollar strength

The US Dollar has endured considerable selling pressure over the last few trading sessions. US Dollar bears have now unwound about one-third of gains recorded by the DXY Index during the first quarter. This seems to follow unwavering dovish guidance conveyed in recent Fed speeches. Treasury yields have struggled to move higher as a result, which in turn, seems to be largely fueling US Dollar weakness.

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US Dollar Price Chart Forecast EURUSD with Bund to Treasury Yield Spread Overlaid

Chart by @RichDvorakFX created using TradingView

EUR/USD price action, for example, has climbed 167-pips while the ten-year Bund to Treasury yield spread has increased 7-basis points so far this month. Broadly speaking, there is a strong direct relationship between sovereign interest rate differentials and the direction of major currency pairs. This fundamental catalyst stands out as a primary driver of where EUR/USD and the broader US Dollar might trend going forward.

of clients are net long.

of clients are net short.

Change in Longs Shorts OI
Daily -2% -2% -2%
Weekly -28% 27% -3%

Looking ahead to next week, Treasury yield volatility could quicken once more in light of high-impact event risk surrounding the release of US inflation data. Monthly CPI figures are scheduled to cross market wires on Tuesday, 13 April at 12:30 GMT. The consensus forecast for headline inflation stands at 2.5% while core inflation is expected to come in at 1.6% according to the DailyFX Economic Calendar. This would be an acceleration from 1.7% and 1.3% reported last month, respectively.

Treasury yields and the US Dollar could snap sharply higher if CPI data is reported higher than market estimates. Conversely, the US Dollar might extend its latest stretch of weakness if the March CPI report reveals that inflation is not running too hot. This is considering that intolerably high inflation has potential to force the Federal Reserve to blink and rethink its timeline for tapering policy. That said, traders have started to walk back their pricing of a full Fed rate hike by December 2022 as FOMC officials double-down on their calls for ‘transient’ inflation.

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This brings to focus a scheduled speech from Fed Chair Jerome Powell due Wednesday, 14 April at 16:00 GMT. Powell might provide color on the inflation report, though it is unlikely that the head central banker changes his tune in response to just one datapoint. This stands out as a potential headwind for the US Dollar, but once again, the direction of the broader DXY Index seems to hinge largely on Treasury yields. Looking later in the week ahead, retail sales data due Thursday, 15 April at 12:30 GMT could also spark a reaction in Treasury yields as well as the US Dollar.

— Written by Rich Dvorak, Analyst for

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