Sun, April 21, 2024

5% US 2-Year Yield Battle: 2023’s Market Outlook

USD money

Quick Look

  • US 2-year Yield remains static above 5%, with market positioning aggressively net-short.
  • Federal Reserve’s policy is expected to maintain the target range at 5.25% – 5.50% in the near term.
  • A significant reduction in net-short exposure for US 2-Year Notes, hinting at potential yield declines.
  • Technical analysis suggests a challenging environment for the US Dollar Index and US 2-year Yield.
  • EUR/USD shows signs of consolidation, with a neutral short-term outlook but potential for further declines.

In 2023, the US 2-year yield has remained stubbornly above the 5% mark despite aggressive net-short positioning in the market. This positioning suggests difficulties for the yield in surpassing the 5% threshold again, reflecting a broader market sentiment that anticipates potential headwinds for the US Dollar (USD). The Federal Reserve’s policy expectations have contributed to this landscape, with Fed Fund Futures indicating a likelihood of the target range staying at 5.25% – 5.50% for the forthcoming meetings. Moreover, there’s a projected 51.8% chance for the first rate cut in June. However, the probability of subsequent cuts falls below 50% over time.

COT Reveals Shift: Yield’s 24-Week Low

The Commitment of Traders (COT) report offers a nuanced view of market dynamics, revealing a significant decrease in net-short exposure for the US 2-year Note to a 24-week low. Despite this reduction, the net-short positioning remains historically stretched, suggesting the market’s bearish stance on US interest rates might be overextended. This shift, coupled with a 17.4% decrease in short bets from their peak in November and subdued gross long exposure, implies that a continued reduction in net-short exposure could lead to yield drops, altering market expectations.

2023’s Yield Peak? Technicals Say Yes

From a technical standpoint, the US Dollar Index and US 2-Year Yield face scepticism regarding their ability to surpass their 2023 highs. The Relative Strength Index (RSI) on the weekly chart is in overbought territory, suggesting a potential peak in yield. This technical perspective aligns with broader market bias, anticipating a retracement in the USD once yields complete their current rebound, with expectations for the USD index to stabilize above its December low.

EUR/USD: Neutral Now, Downward Next?

Turning to the EUR/USD pair, the current consolidation phase from 1.0694 keeps the intraday bias neutral. The short-term forecast leans towards a decline, provided the 1.0804 resistance level holds, potentially retesting the 1.0447 support level. Conversely, a move above 1.0804 could signal a shift towards a bullish bias, setting the stage for a more robust rebound. From a longer-term perspective, the price actions from 1.1274 are viewed as a corrective pattern, with a sustained break below 1.0722 support hinting at the commencement of a downward trajectory towards 1.0447 or lower.

This intricate analysis offers a comprehensive outlook on the 2023 financial landscape. It focuses on the US 2-year Yield and includes the Federal Reserve’s policy expectations and market sentiment. Market participants are navigating these dynamics. Evolving patterns in net-short exposure, technical indicators, and currency pair movements are crucial. They provide insights into future trends and potential investment strategies.

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