Forex Today: Dollar struggles despite higher yields, USD/JPY tests key 150.00 level

Here is what you need to know on Thursday, October 20:

The US dollar loses its recovery mode in early European hours, despite Treasury yields riding higher near multi-year highs on expectations of steeper Fed rate hikes. The tide turned against USD bulls after the US S&P 500 futures flipped to gains on renewed optimism that China could be moving away from its zero-Covid policy. Bloomberg reported, citing people familiar with the discussions, Chinese officials are debating whether to reduce the number of time people coming into the country must spend in mandatory quarantine. Most of the Asian indices cut losses, tracking the upswing in Chinese stocks.

Investors, however, still remain cautious amid elevated bond yields and simmering US-China tensions over Taiwan and chip manufacturing. China convened chip firms for emergency talks after US President Joe Biden announced curbs. On Wednesday, Nikkei reported that the US is in talks with Taiwan to co-produce American weapons. Meanwhile, global yields surged on Wednesday after the UK and euro area inflation showed no signs of abating, raising recession threats. The US Treasury yields rallied hard amid policy contrast between the Fed and most major global central banks. The benchmark 10-year US rates climbed to the highest level in 14 years above 4.15%.

Markets also remain on tenterhooks amid an imminent risk of Japanese FX market intervention, as USD/JPY challenges the key 150.00 mark, the level unseen since August 1990. The Bank of Japan (BOJ) announced an unscheduled emergency bond-buying in early Asia but it failed to stem the yen decline. The ongoing Japanese verbal intervention also did little to rescue JPY bulls.

GBP/USD is on the back foot around 1.1200, as the UK political drama deepens. Britain's Interior Minister Suella Braverman’s abrupt resignation undermines PM Liz Truss’ leadership authority. “Officers from 1922 committee, in charge of running Britain's Conservative Party leadership contests, are set to meet on Thursday to discuss the escalating leadership crisis,” according to The Telegraph. Meanwhile, the 40-year high UK inflation rate continues to cast clouds on the BOE’s next policy move, keeping the bearish bias intact around the pound.

EUR/USD is attempting a minor bounce towards 0.9800, helped by the retreat in the US dollar but higher yields continue to cap the upside attempts. Hot factory-gate inflation in Germany supports calls for a 75 bps ECB rate hike next week, favoring EUR bulls ahead of Eurozone Current Account data.

Meanwhile, the commodity currencies bear the brunt of rallying yields, making them less attractive. AUD/USD keeps the red around 0.6250 amid softer Australian Employment data. China’s central bank kept the Loan Prime Rate (LPR) unchanged across the time horizon. Fresh record lows in the yuan vs. the US dollar are also boding ill for the aussie as well as the kiwi.

USD/CAD is holding the lower ground near 1.3750, as the US dollar retreats while WTI rebounds 1% on the day above the $85 mark.

Gold is capitalizing on the latest leg down in the dollar, having recaptured $1,630 on the road to recovery. But the further upside appears elusive amid higher yields. The US weekly Jobless Claims, Existing Homes Sales and Fedspeak will be closely eyed for fresh hints on the Fed rate hike outlook.  

Bitcoin price is recovering ground after hitting fresh weekly lows below $19,000 while Ethereum is keeping its range below $1,300.