10-year yields in the US are now down by 5.5 bps to 3.625% and that is weighing further on USD/JPY today. The pair is now down 1% to fresh lows at 140.43 and that is bringing closer the December 2023 low at 140.24 as well as the 140.00 mark. The bounce early yesterday was certainly short-lived, that especially as traders continue to price in stronger odds of a 50 bps rate cut by the Fed next week.
As things stand, Fed funds futures are showing ~116 bps of rate cuts by year-end. Personally, I still think that's a step too far but traders aren't backing down from their conviction this week. The odds of a 50 bps rate cut next week are now at ~41%.
Anyway, a key chart to watch for the dollar and USD/JPY as we look to close out the week will be 2-year yields.
It is staying close to the 2023 low near 3.55% currently. A break lower there might be overstepping in terms of Fed pricing but one can't really rule that out at this point.
This market has a tendency to overreact before running back that pricing if they can't bully the Fed to get their way. That's what we saw before with the supposed six rate cuts priced in for 2024 at the end of last year.
