Could anything derail the Fed on Wednesday?

Where next for the greenback?

The US dollar has staged an impressive turnaround so far this year after 2017, which was characterised by a sliding greenback. However, in 2018 (since February’s trough) the US Dollar Index has gained more than 7% to reach its peak in May. As for treasuries, the market continues to sell-off, prompting investors to speculate that the 30-year bull market for bonds could be coming to an end. The yield on the 10-year US treasury bond is up more than 46% from the trough in September. Analysts are watching closely to see when the yield will climb back up above the psychological 3% handle, and what that might mean for equity markets.

In theory, the allure of higher bond yields should drive investors into bonds and spur selling in the equity markets. However, for financial stocks, higher yields are seen as a positive, with increasing interest rates meaning improved net interest margins for the banks.

Timing the next recession

The US yield curve hit the flattest level in a decade this week, with the spread between the 2-year US treasury bond yield and the 10-year US treasury bond yield shrinking to 41 basis points, the narrowest level since August 2007. An inverted yield curve is often considered to be a precursor to a recession, which is why the market is keeping a close eye on the curve’s gradient. However, there is variability between the time lag between an inversion and a recession.