To be more specific, how does this play out on the outlook for 10-year Treasury yields? Here's a look at the chart at the moment.
At the start of the year, the narrative was that this was supposed to be where the dollar and yields peak as major central banks - especially the Fed - will start to look for a policy pivot. That hasn't quite been the case as inflation is still rather sticky and the economy is holding up well, making it easier to navigate a soft landing.
During the banking crisis in March through to April, there was a strong bid in bonds amid safety flows but even that didn't really take 10-year yields in the US below 3.30%. Since then, we've gotten a decent bounce as markets reprice in Fed odds but we are now hitting another critical juncture on the charts.
The 3.85% mark is where the upside stalled in May and June, and we are back up against that level now with the added technical level from the key trendline resistance (solid white line) from the October and March highs.
That is posing a major technical test for traders as a break of that will open up the path towards 4% rates next.
The question is how convinced is markets that the Fed will continue to keep tightening after the pause in June? There seems to be an air in markets that they are somewhat certain that it is just a "skip". However, if the data in the next few weeks points to softer price pressures again, will we see just another "skip" in July?
I would argue that the next move in the bond market is going to highly depend on the data. And that will make this week's US non-farm payrolls a critical one to watch just in case. Of course, the US CPI data on 12 July warrants more attention and will be a more decisive one. But as seen in the chart above, traders are already getting angsty.
A break of the key levels highlighted above opens up space to 4% with the March high near 4.09% also a potential marker next.
And that will in turn have an effect on Japanese yen pairs, so just be mindful of that considering USD/JPY is already sitting near intervention territory.
