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Where will a limit stress test against the Federal Reserve push the dollar?

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Walk out of the thorns, there is a bright road covered with flowers; when you reach the top of the mountain, you will see the cloudy mountain scenery like green clouds. In this world, a star falls and cannot dim the starry sky, a flower withers and cannot desolate the whole spring.

Hello everyone, today XM Forex will bring you "[XM Forex Platform]: Where will a limit stress test for the Federal Reserve push the US dollar?". Hope it will be helpful to you! The original content is as follows:

On Friday (September 12), the U.S. bond market showed signs of cautious recovery, with the 10-year yield reaching 4.036%, a slight increase of 0.32% during the day, rebounding from the previous day's low of 3.988%, but overall it still hovered around the 4% mark. The US dollar index rose slightly by 0.14%, and the latest was 97.6579, with still buffering space from the recent low of 96.3729, but it has not broken through the previous high of 98.8487.

The entire market atmosphere is like a tug-of-war: the expectation of interest rate cuts at the Fed's interest rate meeting next week is like a shadow, coupled with the hidden liquidity concerns in September, the U.S. bond curve is shaking between short-term relief and long-term pressure. Some traders bluntly stated that bond market volatility this week is "like testing the Fed's bottom line", and the resilience of the dollar is seen as a "suspended retreat of safe-haven funds."

From a broader context, weak employment data at the beginning of this week - new jobs were much lower than expected - directly ignited the market's bet on the Fed's restart of easing. The futures market has priced the probability of a 25 basis point interest rate cut next week to nearly certainty, while the 50 basis point "feast" has only 10% of the chance left. A report from well-known institutions pointed out that this expectation is gradually spreading from the short-term to the long-term, but the liquidity pumping effect brought by the wave of government bond issuance has made bond market investors feel alert. Recalling the accelerated pace of government borrowing after the debt ceiling was raised last month. Although the scale of bank reserves was higher than the peak tightening period in 2019, the use of RRP tools has been halved from US$2.6 trillion to US$29 billion. A senior strategist xmaccount.commented: "There is always a sense of restlessness in September, and the bet on the steeper bond market curve. Now we are betting whether the Fed will take action in advance to stabilize the water level."

The US dollar side, the index's microThe rise is not a strong return, but a relative support for non-US currencies. Although the euro and pound have slightly pulled back, the weakening of safe-haven assets such as the Japanese yen and Canadian dollars highlights the market's sensitivity to global policy differentiation. Overall, this week's market is very similar to the "mirror game" between the bond market and the US dollar: every time the yield drops, the US dollar will breathe a little more, but once the liquidity signal becomes tighter, the chain effect will quickly amplify. This lays the groundwork for next week's trend - the Federal Reserve's dot chart and chairman's speech will directly test the bond market's ability to bear pressure.

Lilability concerns dominate: multiple sources of pressure in the bond market in September

At the beginning of next week, the US bond market will face the liquidity final quarter test, which is not only a technical fluctuation, but also a touchstone for the interweaving of fundamentals and policies. Treasury issuance has expanded dramatically in recent months, and net supply has pushed traders’ alertness to the fund pool since the debt ceiling was raised in July. Analysts from well-known institutions emphasized in the report that this surge in borrowing often declines in parallel with the Fed's overnight reverse repurchase demand, and the scale of bank reserves is under pressure - it is expected to fall below the $3 trillion mark by the end of September. The repurchase market has already shown signs: last Friday, the overnight financing cost (SOFR) mortgaged by US bonds rose to 4.42%, a two-month high. Although it fell slightly to 4.39% on Thursday, the spread between SOFR's one-month forward and federal funds rate reached a negative 7.5 basis points, a record low. This means that the market expects financing conditions to tighten at the end of the quarter, and the low-risk premium of bonds is being squeezed.

This liquidity pumping effect is not an isolated event. The Federal Reserve has continued to shrink its balance sheet for more than three years, and its balance sheet has contracted from its peak. Coupons are xmaccount.combined with the end-of-quarter nodes of corporate tax days and coupon settlement, which is easy to repeat the "fund shortage" in September 2019. At that time, the sharp drop in bank reserves led to a surge in repurchase rates, and the situation was not eased until the Fed injected liquidity. The view of a short-term strategy manager is widely circulated: "Technical factors and tax waves, September always seems to be walking a tightrope - the Fed's standing repurchase tool (SRF) is a safety net, but who knows if it is enough?" At present, although bank reserves are much higher than in 2019, the halving decline of RRP has made liquidity a core variable in the bond market. Citi's report further pointed out that as the supply of Treasury bonds increases, banking reserves will continue to decline, and the risk of tightening this month cannot be underestimated.

From the US dollar perspective, these liquidity pressures are double-edged swords. On the one hand, if bond market fluctuations trigger risk aversion, funds will flow to the US dollar as a "safe haven" to support the index to stabilize; on the other hand, if yields unexpectedly rise due to oversupply, the interest rate support of the US dollar will increase, but this may also amplify financing costs and indirectly drag down economic growth expectations. Some people liken this to "domino in the bond market": a negative signal of the SOFR spread is a sign of tightening buyback conditions, or force the Fed to send more dovish signals at its meeting next week. Overall, the "pressure month" label in September has been firmly attached, and bond market investors are closely watching these indicators, and any tightening beyond expectations may trigger chain sell-offs.

Trump's tariff rhetoric once again this weekAlthough the market nerves have not carefully studied the details, the concerns it has caused have penetrated into bond market pricing. The well-known portfolio manager said the remarks have exacerbated the concerns of fiscal deficits and pushed investors to increase their sensitivity to long-term yields. Market discussion focuses on this: "As soon as the tariff storm blows, the bond market will be uncertain in multiple levels - safe-haven buying is entering the market, but what about the supply side?" This intertwined with the continued uncertainty of the situation in Russia and Ukraine, further strengthening the defensive attitude of the bond market.

Technical signal: A subtle game between the bond market curve and the US dollar indicator

Turning to the technical level, the daily chart of US Treasury yields shows obvious downward action potential, but the support level test will be more severe next week. The latest 10-year yield rate was 4.036%. Although it rose 0.32% during the day, it was still below the 50-day moving average 4.340 and 100-day moving average 4.353. The previous low was 3.988%, followed by the shadow, and the previous high was 4.352% and the previous high was a short-term ceiling. The MACD index (12,26,9) DIFF is -0.019, DEA is -0.026, and columnar is 0.015. Although the DIFF line penetrates DEA, the strength of the columnar line to positive is limited, which implies that the action can be temporarily suspended rather than reversed. This echoes the overall flattening of the curve: the short-term benefit is from the downward pressure on interest rate cuts, while the long-term is supported by supply and fiscal concerns, and the mid-term 5-7-year lags, and the interest rate spread has expanded to the steepest 1.25% in recent years.

The technical opinions are resonant. A chart analyst pointed out: "The weak turning positive in the bond market MACD is like giving yields a breather, but if it is lost at the end of the quarter, the flattening curve will accelerate." Looking back from a historical perspective, under similar configurations, yields often bottom out and rebound before the end of the quarter, but the current background of the decline in reserves has limited the rebound space. The 30-year yield fell to a half-year low of 4.35%, which is also proof of the rise in long-term bonds - strong auction demand, bid coverage ratio of 2.58 is higher than the average, and there are obvious signs of influx of safe-haven funds.

The technical map of the US dollar index is even more entangled. The daily line was 97.6579. After the rise of 0.14%, the 50-day moving average was 98.1225% of the recent resistance, 98.5970 on the 100th and 102.1736 on the 200th were far above, with the previous low of 96.3729 providing buffer, and the previous high of 98.8487 waiting to be broken. MACD(12,26,9)DIFF-0.1528, DEA-0.1108, columnar-0.0841, negative values in the entire line show that shorts dominate, but the convergence between DIFF and DEA suggests a potential turning point. If bond market yields keep the 4% mark, the relative strength of the US dollar may continue; on the contrary, falling to 96.37 will increase the rebound space of non-US currencies. A foreign exchange veteran xmaccount.commented: "Although the US dollar's MACD negative column is deep, the flattening of the bond market curve is its invisible anchor - if the liquidity is tightened, the index will be more resilient."

These technical signals are not isolated. Next week, the steepening of the bond market curve will be dominated by the downward trend of short-term interest rates, as a chief investment officer said in the report: "The next stage of the yield curve is not long-term debt.Selling, but the Fed restarts the interest rate cut cycle. "Combined with futures pricing, at least 75 basis points of looseness by the end of the year has been put into the price. The technical moving average suppression and MACD convergence are predicting the oscillation pattern at the beginning of next week: the yield may consolidate in the range of 4.00%-4.05%, and the US dollar index is tug-of-war around 97.50-98.00. It is worth noting that the VIX index remains in an optimistic range of 14.98, and the signs of small-cap US stocks leading the rise also indirectly support the defensive allocation of the bond market.

Next week outlook: Bond market volatility intensifies, and the US dollar is under pressure to find the bottom

Looking forward next week, the US bond market will usher in a high-density event window, The dual test of liquidity and policy signals may dominate the trend. The Fed's meeting from Tuesday to Wednesday will become the focus, and a 25-basis point rate cut is almost a foregone conclusion, but if the dot chart shows a further loosening path in 2026, long-term yields may continue to hit lows, and the curve flattening accelerates. Under the pressure of the end of the quarter, if the negative value of the SOFR spread expands, the tightening of the repurchase market will amplify the fluctuations, and the 10-year yield may fluctuate between 3.99% and 4.10%, and the previous low of 3.988% becomes the key defense line. The view of well-known strategists echoes here: "When risks are fully priced, the market rarely collapses, but the volatility in September will always exceed expectations. ”

The US dollar index faces the test of the transmission of the bond market. The decline in yields will weaken its interest rate advantage, and the index may fall near 97.00, but if risk aversion is heated up due to tariff remarks or the escalation of the situation in Russia and Ukraine, the support level 96.37 will be guarded. The consensus is: "The bottom of the US dollar is at the bond market level - the Fed is dovish, and the index is easy to defend 97, but if the supply wave pushes up the yield, the rebound space will be opened. "Overall, the probability of the bond mayor leading the decline is high, while the US dollar bottoms in the 97-98 range. Every change in liquidity indicators may cause waves. The market is like a chess game, and next week's move will reshape the autumn rhythm.

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