Dollar Soars on Hawkish Shift as Yields Surge

The US Dollar is heading into a massive week as yields surge and gold breaks. The Fed's recent hawkish shift has markets looking for two more hikes before the end of the year, putting pressure on upcoming data releases. However, a key factor that could impact the Fed's decision-making is the rapidly increasing government spending and debt-to-GDP ratio, which has led to a significant increase in supply in US Treasury markets.

The massive government spending and expanding debt-to-GDP ratio have pushed prices lower and yields higher in US Treasury markets. The Fed's efforts to address this issue through larger Treasury buybacks have been seen as insufficient. If markets gain confidence that inflation is getting under control, demand could flow into bonds, easing the picture around yields.

USD/JPY remains a dominant driver in FX markets, with a crowded carry trade still tilted to the long side from a fundamental perspective. However, recent intervention from both the US and Japan has pushed notable pullbacks over the past couple of months.

The weekly chart shows a clear shift, but the delta between US and Japanese inflation combined with the positive carry on the long side of the pair has helped USD/JPY hold higher-lows on pullbacks. The four-hour chart shows price grasping onto support at 156.68, leading to another bounce.