Dollar Under Pressure as Treasury Yields Fall: USD/JPY and USD/CAD Await Fresh Data

The US dollar has come under moderate pressure as long-term US Treasury yields have declined. Another factor has been the US Treasury Department’s decision to increase buyback operations for securities with maturities ranging from 10 to 30 years in an effort to support market liquidity. Against this backdrop, the 30-year Treasury yield fell by around 9 basis points to 5.19%.

The decline in yields has weakened one of the key sources of support for the dollar and has been particularly significant for USD/JPY, which remains highly sensitive to movements in the US bond market.

The recently released FOMC minutes provided a counterweight. The minutes revealed growing concerns among policymakers about inflation risks, with several officials favouring a rate hike as early as the July meeting. This kept the overall tone relatively hawkish. Although policymakers were divided over whether an immediate rate increase was necessary, inflation risks remain a central concern for the Federal Reserve, while future decisions will continue to depend on incoming economic data.

Today, markets will focus on a fresh batch of US economic figures. The Philadelphia Fed Manufacturing Index is expected to fall to 24.1 from 41.4, while initial jobless claims are forecast at 210,000. Weaker-than-expected figures could put additional pressure on the dollar, whereas resilient data may allow the currency to recover some of its recent losses.

For the Canadian dollar, commodity-price data will provide an additional catalyst. The Raw Materials Price Index (RMPI) is expected to decline by 1.8% following a 6.9% drop in the previous month, making the actual reading potentially important for the further direction of USD/CAD.

USD/JPY

USD/JPY made several unsuccessful attempts to approach the key 160.00 resistance level before sharply retreating towards 158.00 as US Treasury yields declined.

If selling pressure on the dollar persists, the pair could move towards the 156.70–157.20 area. At the same time, a corrective rebound following yesterday’s decline could lift the pair towards 158.60–159.20.

Key events for USD/JPY:

• today at 15:30 (GMT+3): Philadelphia Fed Manufacturing Index;
• today at 15:30 (GMT+3): US initial jobless claims;
• tomorrow at 02:30 (GMT+3): Japan national core Consumer Price Index (CPI).

USD/CAD

USD/CAD remains in a broader downtrend following the formation of a “tower” pattern in early July. Yesterday, sellers tested the important 1.3800 support level.

A sustained break below yesterday’s low could open the way towards 1.3730–1.3760. If 1.3800 continues to hold as support, however, the pair could stage a recovery towards 1.3840–1.3870.

Key events for USD/CAD:

• today at 15:30 (GMT+3): Canadian Raw Materials Price Index (RMPI);
• today at 17:00 (GMT+3): US Leading Economic Indicators;
• tomorrow at 15:30 (GMT+3): Canadian core retail sales.

Outlook

USD/JPY and USD/CAD remain caught between opposing fundamental forces. Falling Treasury yields are weighing on the dollar, while the relatively hawkish tone of the FOMC minutes is limiting the scope for a deeper decline.

The market’s attention is now turning to the latest US economic data. Weaker figures could extend the dollar’s correction and increase downside pressure on USD/JPY and USD/CAD, while stronger-than-expected releases could restore support for the US currency and trigger a recovery in both pairs.

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