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13.04.202107:27 Forex Analysis & Reviews: USD tries to develop long term rally

Exchange Rates 13.04.2021 analysis

A sharp rise in US Treasury yields and expectations of a quicker recovery of the US economy from the pandemic lifted the US dollar index by more than 3.6% in the first quarter.

However, there were the first signs that the revival of the global economy was accelerating as well. Hence, investor slightly reduced their bets on the strengthening of the greenback.

At the end of last month, the US currency reached almost five-month highs around 93.45. Last Thursday, it fell below the 92.00 level for the first time since March 23.

The US dollar stumbled after the fall in the yield of 10-year bonds to 1.617% last week from almost 15-month peaks of 1.776%, notched on March 30.

Now market participants are trying to grasp whether the recent weakening of the US dollar is just an echo of the quarterly revising of portfolios or it may dip even more.

In the first case, the US dollar may recover in the near future. In the second case, the greenback will continue to incur losses, signaling the beginning of a downward movement.

Analysts at Saxo Bank are puzzled as well. They are uncertain whether to wait for another consolidation in such currencies as CAD, NZD, AUD, and only then open short positions on USD, or whether the time is already ripe for this, given the almost three weeks of mixed movements of the US dollar against these currencies.

On Friday, the greenback was able to recoup some of its losses. Nevertheless, it ended the past five days with a decline of almost 1%, which was the worst weekly performance this year.

The US dollar was supported by positive data released on Friday, which showed that the US Producer Price Index in March gained 1% on a monthly basis. This is in line with expectations of higher inflation as the national economy opens up and pushes the Treasury yield curve back to growth.

Exchange Rates 13.04.2021 analysis

Fed officials have repeatedly said that any pressure on prices will be temporary.

These statements somewhat calmed down market participants, but they still tend to be cautious.

On Tuesday, the report on the US consumer price index will be published, which may determine both the dynamics of US Treasury yields and the US dollar.

According to forecasts, in March, inflation accelerated by 0.5% on a monthly basis and by 2.5% on an annual basis.

On Monday, the greenback tried to extend Friday's growth but faced a strong resistance level near 92.30, where the 200-day moving average passes.

The US dollar index was trading just above 92.00. A break of this level may open the way to the 50-day moving average at 91.50. The support level is located at the level of 91.30 (mid-March low).

Strategists at NAB reckon that the key to the short-term outlook for USD is to understand whether the government bond yield will continue to consolidate near current levels or will go higher. If so, it will foster the growth of the US dollar.

"USD has some upside potential this week. Strong US economic data will highlight the divergence between the US's fast economic recovery and the more stunted recoveries in other developed economies," Commonwealth Bank of Australia strategist Kimberley Mundy pinpointed. "

In addition to the report on US inflation, data on the retail sales index and industrial production index in the US for March will be released this week. Experts project that last month, the retail sales grew by 6% on a monthly basis and industrial production by 3.5%.

However, analysts note that the lack of signals from the Federal Reserve about tightening monetary policy, despite the acceleration of inflation, may restrain the strengthening of the US dollar.

Fed Chairman Jerome Powell will give a speech speak at an event of the Economic Club of Washington on Wednesday.

Exchange Rates 13.04.2021 analysis

Last Sunday, he pinpointed that the US economy had reached a turning point. "What we're seeing now is really an economy that seems to be at an inflection point. We feel like we're at a place where the economy's about to start growing much more quickly and job creation coming in much more quickly. So the principal risk to our economy right now really is that the disease would spread again. It's going to be smart if people can continue to socially distance and wear masks," he said in an interview.

This week, investors are awaiting the speeches of the Vice Chairman of the Federal Reserve, Richard Clarida, the President and Chief Executive Officer of the Federal Reserve Bank of New York, John Williams, and the President of the Federal Reserve of San Francisco, Mary Daly.

In the near future, the greenback may receive support from the following factors: a local correction in the US stock market after reaching record highs, an upward correction of the US dollar itself after a significant drop in the first week of April, and a resumption of growth in US Treasuries.

As for the longer-term outlook, the risk of a reduction in US fiscal stimulus in the coming months is increasing, which could negatively affect the US dollar, analysts at Saxo Bank said.

Democratic Senator Joe Manchin recently said that he would not vote to eliminate or weaken the filibuster under any circumstances. He would not also support the repeal of the right to delay Senate hearings, nor further large spending. "The time has come to end these political games, and to usher a new era of bipartisanship where we find common ground on the major policy debates facing our nation," he said. He thinks that all politicians should work together and more efforts should be made to reach an agreement with Republicans. Notably, this senator is an unusually conservative Democrat and can stop from passing the Biden administration's fiscal spending plan. It is not yet clear what will happen if there is a political stalemate in Washington and the prospect of strong fiscal stimulus fades. It will probably be bearish for the US dollar if US Treasury yields continue to decline and the Fed takes a dovish stance.

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