US dollar status pivotal as FX volatility remains sluggish

FX volatility has yet to pick up on weak risk sentiment. USD status key here.
The US dollar rally consolidated over the last couple of sessions, with EURUSD bouncing from 1.1469 to as high as 1.1552 yesterday before the US dollar found support. That 1.1550-75 area in EURUSD is key resistance if this USD rally is to remain in place, together with the 153.00 support area in USDJPY after a new local low of 152.82 overnight was rejected and we trade closer to 153.50 as of this writing in early London hours.

So far the volatility in risky assets has yet to show enough teeth to trigger notable contagion into fixed income and FX, with USDJPY 1-month volatility pinned near 18-month lows. We’ll need volatility and contagion across asset classes to pick up significantly to find out whether the US dollar or the JPY performs best on risk aversion as a safe haven – I suspect the latter. In the meantime, despite yesterday’s reversing out of the surge in US treasury yields, JPY has a hard time sustaining a bid.

Amidst the paucity of US data, we got a very ugly Challenger Job Cuts figure of 153,000 for October, the worst number since March.

Bank of England sees modest GBP relief. The Bank of England meeting saw a narrow 5-4 majority in favor of not cutting the policy rate this time around, with clear guidance that the bank sees a softer labor market and rising confidence that inflation is falling. While the more dovish guidance this time did raise odds of a December cut (now over 70% probability), the overall rate trajectory hardly shifted as two-year UK rates fell back less than two basis points and are solidly mid-range of last several trading sessions. This saw some relief in GBP pairs – EURGBP backed off below 0.8800 (watch that important 0.8750/60 area if this is going to go into full reversal mode) and GBPUSD surged well above 1.3100 after that near test of 1.3000 earlier this week.

AUDNZD a nice rate divergence story – what a trender. While many corners of G10 FX are not terribly inspiring and choppy and rangebound, the outstanding trending story of the moment is the AUDNZD bull as the widening yield divergence at the front end of the Australian and New Zealand yield curves continues to drive this one higher. Today we are seeing levels above 1.1550, levels not seen since late 2013. The 2-year yield spread has reached almost 100 basis points, a level only seen in the last 25 years during a brief episode in the 2010-2011 period, when AUDNZD traded in the 1.25-1.35 area, so there could be room for this rally to extend to 1.2000+.

Chart: EURUSD
EURUSD has bounced here after taking out the 1.1542 range lows recently and only managed to push to a 1.1469 low in low-volatility fashion before bouncing back to test the now key 1.1550-1.1575 resistance. If the pair works back above there and above 1.1600, the near-term bearish case looks lost, while a push and close back below 1.1500 here into the end of the week would support the trending case. It’s all very low volatility stuff as FX has yet to see vols pick up meaningfully despite the spike in volatility in risky assets. Bond market volatility has picked up slightly, but only after punching to new multi-year lows recently since late 2021.