DXY (96.77) Has Troubles Leaving the Recent Multiyear Lows Behind

Markets

UK gilts crashed yesterday. Yields on the long-end of the curve surged by almost 20 bps (30-yr) over fiscal concerns. The worrying state of public finances in the UK (and elsewhere) have become an evergreen but moved into the spotlights again after PM Starmer, pressured by internal revolt, ditched the £5bn cost-saving part from the welfare bill. It puts even more strain on the already extremely tight budget Chancellor Reeves has to work with. She now has to look for additional spending cuts or another rise in tax for the yearly October budget if Reeves wants to adhere to her self-imposed fiscal rules. A third option is changing (ie. loosen) those rules. That risks unnerving markets, though. Such accounting tricks are mere window-dressing and do not improve the deficit situation, on the contrary. That’s why Reeves consistently ruled it out after having altered them once ahead of the October 2024 Budget. But if Reeves won’t, maybe another Chancellor will. Speculation for Reeves to be sacked surged in yesterday’s House of Commons session where a questioned Starmer failed to back his running Chancellor. A visibly upset Reeves shedding a tear added to the drama – and perhaps even to the yield rally. The pound joined the sell-off with EUR/GBP soaring to the highest levels since mid-April in the mid 0.86/87 area. It will be tricky for UK assets to get out of the crosshairs now. Markets ex UK suffered collateral damage. Both the US and European yield curve bear steepened. The former rose between 1.2-3.8 bps with the dip following the disappointing ADP job report easily wiped out. European swap yields rose 1-5.2 bps. Even Japanese yields rise 6 bps and counting at the long end, despite a successful 30-yr auction. The euro and dollar balanced each other, resulting in a status quo around EUR/USD 1.18. DXY (96.77) has troubles leaving the recent multiyear lows behind. It could be make or break for the greenback today with the June payrolls and non-manufacturing ISM scheduled for release. EUR/USD is eager for an upside break out of the upward sloping trend channel, all the way back to the 2021 high. A further drop in DXY below the recent troughs implies a return to 94.65 and 95.24 initially before the 2021 low of 89.21. Employment growth is expected to rise by 106k with a minor uptick in the unemployment rate to 4.3%. The ISM would recover from the sub 50 print in May to 50.6, barely suggesting growth. Both the dollar and front-end yields are keen to spot any weaknesses after Powell’s communication twist. The long end in theory is better supported by the fiscal topic – the OBBBA is currently stuck in the House over a failed procedural vote – but we could see that curve segment joining the front lower as well in case of a miss.

News & Views

The National Bank of Poland yesterday unexpectedly cut its policy rate by 25 bps to 5%, conflicting with signals coming from several MPC members recently. In its policy statement the NBP now assesses that inflation in the coming months might fall below the upper bound of the NBP’s target band (2.5% +/- 1%pt). Inflation in June printed at 4.1% and the NBP expects that the still-to-be-published core reading will be close to May’s 3.3%. The new forecast for growth over the 2025-2027 period didn’t profoundly change (2025: 2.9%-4.3%, 2026: 2.1%-4.0%, 2027: 1.3%-3.7%), but inflation was downwardly revised, in particular for this year (2025: median 4.0% from 4.9%, 2026: 3.1% from 3.4%, 2027: 2.4% from 2.5%). The NBP gave few indications on future rate cuts. Further decisions will depend on incoming information regarding prospects for inflation and economic activity. Fiscal policy stance, developments in demand pressure and situation in the labour market in subsequent quarters, as well as the level of administered energy prices, are factors of uncertainty. Governor Glapinski will comment the decision at press conference later today. The zloty declined from the EUR/PLN 4.25 area to close near EUR/PLN4.2655.

Anna Hughes, head the Australian debt office (Australian Office of Financial Management), said the agency is considering to scale back the issuance of ultra-long bonds as funding via those bonds is becoming ever more expensive, Bloomberg reported. The AOFM plans to issue A$150 bln worth of bonds this year with the focus on the 10-y part of the curve. Higher yields at the very long end of the curve might cause the agency to become more flexible in its issuances intentions at those tenors. The considerations of the AOFM mirror similar assessments by other major sovereign issuers as market concerns on high fiscal deficits cause broad-based steepening of yield curves. Even after some easing of late the Australian 30-y yield stands near 4.85% vs 4.25 for the 2-y yield, with the RBA still in an easing cycle.