The dollar weakened sharply after the US Treasury announced measures to support the government bond market, which markets interpreted as a signal that risk appetite was returning. Starting September 9, the Treasury will double the size of its purchases of longer-dated government bonds: the limit for the 10–20-year and 20–30-year segments will increase from $2 billion to $4 billion per operation.
The mechanics of the decision are straightforward and affect several areas at once. The Treasury is creating additional demand for US Treasury securities, directly supporting the government bond market and pushing yields lower. Lower yields on long-term securities ease financial conditions and reduce pressure on the stock market, as elevated Treasury yields have remained one of the key negative factors for equities in recent days.
For the dollar, all of this is very negative, even though the US Treasury has promised to carry out the operation not by increasing liquidity, but by issuing more short-term bills. The implications for risk assets are also clear. Lower yields mean less competition for capital from risk-free instruments, which is positive for the euro, the pound, and other risk assets. Another effect will be increased liquidity in the government bond market: the Treasury is taking less-liquid older issues off the market, thereby easing the burden on market participants' balance sheets.
It is precisely the scale and nature of this operation that has led market participants to dub the decision "new QE." Strictly speaking, this is not quantitative easing in the traditional sense, since the purchases are being carried out by the Treasury rather than the Federal Reserve, and the operation does not involve creating new money but rather replacing one set of securities with another as part of debt management. Nevertheless, the effect on yields and liquidity is similar, which is why the comparison has gained traction and has put strong pressure on the US dollar.
Falling US Treasury yields reduce the interest-rate appeal of dollar-denominated assets for international investors, which also helps explain the currency's sharp decline. Another factor weighing on the dollar is the decline in expectations for a Fed rate hike: following a series of weak economic data releases, traders now put the probability of a September tightening at around 30%, compared with 50% just two weeks ago.
As for the current technical picture in EUR/USD, buyers now need to figure out how to break through the 1.1690 level. Only then will they be able to target a test of 1.1720. From there, the pair could move toward 1.1745, although getting there without support from major market players will be quite difficult. If the instrument declines, I would expect any significant action from major buyers only around 1.1660. If there is no buying interest there, it would be better to wait for a retest of the 1.1638 low or consider opening long positions from 1.1615.
As for the current technical picture in GBP/USD, pound buyers need to break through the nearest resistance at 1.3630. Only this would allow them to target 1.3649, above which a further breakout would be quite difficult. The next and more distant target is the 1.3675 area. If the pair declines, bears will attempt to regain control at 1.3590. If successful, a break below this range would deal a serious blow to the bulls and push GBP/USD toward the 1.3570 low, with the potential for a move down to 1.3545.