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27.04.202107:27 Forex Analysis & Reviews: USD may advance despite April's weakness

If the first quarter was very successful for the greenback, the beginning of the second one, on the contrary, turned out to be worse.

Last week, the US dollar index fell by about 1%, closing in the red for the third week in a row and notching the longest downtrend since December.

The prolonged downward correction of the US currency is making the bulls nervous. Currently, they are trying to figure out "What to do?" and "To what level may the greenback dip?".

However, some investors are confident that the US currency has all changes to climb and resume its upward movement till the end of the year.

They highlight that the United States will continue to outperform its competitors and positive statistical data may be the main catalysts for the growth of the US currency. Therefore, bears should be cautious and do not celebrate victory now as everything may change.

On Friday, the greenback significantly weakened against its main competitors, dropping below the level of 91 and reaching the lowest values since the beginning of March.

The US currency fell in price despite the fact that the statistics released at the end of last week for the United States exceeded forecasts.

The US Manufacturing PMI rose to 60.6 in April from 59.1 in March, showing the strongest growth since May 2007.

In March, new home sales increased by 20.7% compared to the previous month, hitting the highest level since August 2006 which was 1.021 million in annual terms.

Recently, the US dollar has stopped reacting to positive macro statistics on the United States as market participants pay more attention to the Fed's statements. The regulator repeats again and again that despite some progress in the recovery of the national economy, the central bank will continue to adhere to a soft monetary policy.

The next decision on interest rates will be made by the US Central Bank this week.

In addition, a report on US GDP for the first quarter will be published in the coming days. Analysts expect the indicator to soar by 6.5%. ING experts believe that the annual growth may even exceed 7%. In the next quarters of this year, the indicator will reach double digits. They also believe that in May, US inflation will approach 4%.

If these forecasts are true, it will be difficult for the Fed to convince market participants that it will not hike interest rates until 2023.

So far, no major changes in the regulator's policy are expected. However, investors will evaluate the comments of Fed Chairman Jerome Powell regarding the possible curtailment of the quantitative easing program.

Some economists assume that at the next meeting, the Federal Reserve will somehow hint that in the summer or early autumn, the QE program will be cut by $10 billion.

However, most analysts believe that such discussion is pointless. Therefore, Jerome Powell is unlikely to announce some drastic changes in monetary policy on Wednesday. He will once again talk about the benefits of fiscal stimulus, the risks of worsening the epidemiological situation, the need to achieve full employment, and confirm the Central Bank's commitment to the current key rate, even in the face of inflation.

On Monday, the US dollar index fell to an almost eight-week low around 90.65 and then recovered to 90.95.

If the US central bank maintains the status quo but at the same time notes the growth of economic activity in the country and hints at a reduction in the bond-buying program, the US dollar may regain ground.

Jerome Powell's dovish comments could put even more downward pressure on USD and limit its growth.

If the US dollar continues to weaken, it may well reach the March lows in the area of 90.60 and then 89.20 and 88.15.

This week, the greenback may advance against its main competitors amid seasonal and technical factors.

As a rule, in the last days of April, demand for the US currency is buoyant.

In addition, the USD index is approaching the oversold area, having declined almost since the beginning of the month. Profit-Take orders and revision of investment portfolios can support the US dollar in the short term.

In the longer term, the main threat to the greenback may be the prospect of higher taxes in the United States, as well as a more synchronized economic recovery among developed countries.

Joe Biden is going to propose a nearly two-fold increase in the capital gains tax rate for individuals earning more than $1 million. If implemented, the proposal would be the biggest change to the country's tax code since the Reagan Revolution. It will be part of a plan to support American families, which Biden is going to present next Wednesday at a joint session of Congress. In general, this plan is unfavorable for USD, strategists at Saxo Bank said.

Biden's tax plan reduces the risk of overheating the US economy and inflation, and the Fed has even less reason to rush to raise rates, they stressed.

JPMorgan experts believe that the greenback will lose its luster with investors as other developed countries will catch up with the United States in terms of vaccination rates and open up the economy in the second half of the year.

We expect other economies to see a similar rebound as the US is currently experiencing, economists pointed out.

Analysts at Goldman Sachs shared a similar view.

"We believe that market participants are more likely to look for profit opportunities outside the US, thereby lowering investment attractiveness of USD," they said.

Viktor Isakov,
Analytical expert of InstaSpot
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