The dollar index rose on Monday, fueled by U.S. Treasury yields that continued to surge higher in the wake of last week's extremely strong U.S. employment and service sector data that have upended short trades in the U.S. currency premised on market expectations that the Fed will begin cutting rates this year.

The rebound has dealt a blow to EUR/USD, which had fallen as much as 2.95% from last Thursday's peak of 1.1034 to Monday's low.

With 2- and 10-year Treasury yields rising 15bp and 10bp, respectively, on top of Friday's 20bp and 14bp increases, the forex market is pricing back in Fed hikes it had spent recent weeks removing.

Fed funds are now priced to peak near 515bp versus about 490bp leading up to the data, while 50bps of H2 rate cuts that had been projected by markets have been reduced to just 32bp.

The dollar index rose 0.7% on Monday, led by EUR/USD's 0.6% fall and USD/JPY's 1% rise.

The yen was broadly under pressure as longs premised on the BoJ exiting its yield curve control policy soon were warned off by reports that Deputy BOJ Governor Masayoshi Amamiya was in the running to lead Japan's central bank.

Amamiya is seen as the least likely of the candidates to hastily exit the ultra-easy policies he helped create nL1N34L0BD.

EUR/USD probed its pivotal 10-week moving average at 1.0715.
That MA caught the early January retreat to 1.0482.
But 2-year bund-Treasury yields spreads have collapsed to their lowest since Dec.
15, with that day's EUR/USD close at 1.0631.

The fundamental focus is on Fed Chair Jerome Powell's appearance on Tuesday after the Fed downshifted to a 25bp rate hike last week before Friday's data shocks.

President Biden's State of the Union Address also on Tuesday will be monitored for any geopolitical ramifications, particularly regarding China nL8N34M08EnL1N34M1PA and Russia nL1N34M0HC.

The U.S. CPI report on Feb.
14 nL1N34M17N is the next major U.S. release.

Sterling fell 0.15% after already hefty losses against the dollar and euro last week amid dreary UK data, widening labor strikes nL1N34L0D7 and doubts about BoE rate hikes nL8N34M5EJ.

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