Global markets were in a rare lull on Thursday ahead of U.S. jobs data at the end of the week that could easily whip up more cross-asset storms.
Europe's share markets began fractionally lower though there was little movement from either the dollar /FRX or in bond markets, where recessionary warnings having been becoming increasingly shrill again. /US
U.S. Federal Reserve chief Jerome Powell had stuck to his message of higher and potentially faster interest rate hikes during a hearing on Wednesday, but emphasised too that the decision would hinge on the strength of incoming data.
It means traders will be looking even more intently at U.S. payrolls data on Friday and then U.S. inflation numbers which follow on Tuesday.
Financial markets are now pricing in a near 80% likelihood of a 50 basis point rate hike at the Fed's March meeting, up from about 30% at the start of the week. There is also a growing expectation the U.S. central bank could push rates to 6%.
"Our core view is that 5.5% will be enough, but that they (Fed) will have to stay there longer than the market expects." said Iain Cunningham, Co-Head of Multi-Asset Growth and Co-Portfolio Manager of the Ninety One Global Macro Allocation Fund.
The U.S. dollar index, measuring the greenback's value against a basket of major peers, hovered close to a three-month top at 105.57. It, however, lost 0.4% to the Japanese yen at 136.78 per dollar.
Japan's lower house of parliament on Thursday approved the government's nominee Kazuo Ueda to be next central bank governor, signing off on a new leadership that will be tasked with steering an exit from ultra-loose monetary policy.
The Bank of Japan is, however, expected to maintain what it dubs Yield Curve Control and uber-low rates at the last meeting of its current chief on Friday.
Ten-year government yields again hit the BOJ's policy cap of 0.5% on Thursday.
The greenback was also buoyant against the Canadian currency at $1.3803 Canadian dollars, the highest level in nearly four months, thanks to a dovish Bank of Canada, which left its interest rates on hold on Wednesday.
China's yuan meanwhile weakened toward the key psychological level of 7 per dollar after the slowest annual consumer price inflation data in a year, fanning doubts about the strength of its economic recovery.
Benchmark government bond markets remain the main lightning rod for both interest rate expectations and the degree of pain the sharp rises are likely to inflict on the global economy.
The two-year Treasury yields held close to 15-year highs at 5.04%, while the benchmark 10-year yields were steady at 3.9953%.
Most notably, the gap between yields on shorter term two- and longer-term 10-year Treasury notes, hit at a negative 108.2 basis points. That was most extreme inversion since 1981. Inversions are seen as reliable recession indicators.
In Europe too the German 2s10s curve was at its most inverted point since 1992, with 2 year German yields at post-2007 high of 3.35% and 10-year yields at 2.68%.
"Powell conceded that the March decision is data-dependent," said Thierry Wizman, Macquarie's global FX and rates strategist. "The question facing us, therefore, is whether January's economic reacceleration was a blip or a trend."
The pre-payrolls caution meant both S&P 500 futures and Nasdaq futures were 0.3% in the red. The indexes had struggled on Wednesday too after private payrolls beat consensus estimates and demand for home loans increased despite higher mortgage rates.
Forecasts for Friday's key numbers are for a modest payrolls increase of 205,000 after January's 517,000 jump led markets to reprice their monetary tightening expectations.
Overnight in Asia, MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) has sagged 0.6%, after falling 1.4% the previous session. Japan's Nikkei (.N225), on the other hand, rose 0.6%.
Commodity prices were mostly lower, with Brent crude back-pedalling to $82.45 per barrel, U.S. crude down at $76.39 a barrel and global growth-sensitive metal copper down 1%. Gold was slightly higher at $1817 per ounce .
