The US dollar should continue strengthening this week amid the inaction of the Fed towards rising Treasury yields. To add to that, the latest data on the US labor market came out much better than expected, which only suggests that dollar demand will skyrocket further in the markets.
Clearly, this growth in the labor market is the result of the US opening a number of businesses, after infection rate has dwindled in the past days. Vaccination is also ongoing, thus, a sharp increase in activity was recorded in the leisure and hospitality industry.
As for the European Union, ECB officials will have to decide if there will be policy changes soon, since the Eurozone economy continues to be gripped by the coronavirus pandemic. In fact, to date, many restrictions are still under way in Europe, and vaccination programs are not proceeding as quickly as desired.
Rising Treasury yields also pose a number of challenges to the ECB, especially since it must be considered when deciding on what to do with the bond purchase program and interest rates. Of course, the chances of seeing an immediate policy change this Thursday is low, but first hints in this direction may be made.
So today, investors will keep an eye out on the weekly data for bond purchases, as such will let them know if the ECB increased its purchases last week or not. Then, Treasury yields will move based on this, which will accordingly affect the rate of the European currency. If the volume of bond purchases remains unchanged, the euro will most likely retain its current position in the market.
But the current economic lockdown in the bloc, low activity in the service sector and insufficient efforts by health authorities to vaccinate the population ensures that the ECB has no choice but to postpone any policy changes.
With regards to macro statistics, a report from the US Department of Labor said the number of people employed in the US nonfarm sector rose by 379,000 this February, after rising by around 166,000 a month earlier. Many economists expected the figure to increase by only 182,000.
This better-than-expected data shows that improvements in the leisure and hospitality industry are really beneficial, as it resulted in the surge of about 355,000 jobs. Now, the outlook for the US labor market is better, especially since COVID-19 incidents have decreased, and a new financial assistance is on the way. The unemployment rate has also fallen to 6.2% this February, while economists had expected it to remain unchanged.
Unfortunately, US imports have increased this January, by up to 1.2%, thereby hitting an amount of approximately $ 260.2 billion. Exports, meanwhile, rose by only 1.0% and reached $ 191.9 billion.
Of course, this sharp rise in imports led to the further widening of the trade deficit. According to the US Department of Commerce, the deficit reached up to $ 68.2 billion this January, from $ 67.0 billion a month earlier.
As for the Euro area, Germany published a report on Friday which indicated that industrial orders in the country jumped by much more than expected. This January, manufacturing orders rose by 1.4%, while domestic orders fell by 2.6%. Fortunately, the decrease in domestic orders was offset by the sharp jump in external orders.
In that regard, for the EUR / USD pair, a break below 1.1895 will most likely lead to a larger sell-off towards 1.1849 and 1.1800. But if the euro goes back to 1.1945, price may climb again towards the 20th figure, and then to 1.2050.
JPY
Like other world currencies, yen continues to weaken amid rising US Treasury yields. In fact, JPY is now close to reaching 110 per dollar, especially since the latest COT reports show that hedge funds have significantly increased the volume of their short positions in the market.
Now, the USD / JPY pair is on the buyer's side, which means that a break above 108.55 will lead to a new wave of growth towards 109.20 and 109.85. But in the case of a downward correction, support will be provided by 108, just below which is 107.10. Nevertheless, it is clear that the yen, along with the Swiss franc, is bearing the brunt of the dollar's recovery, which is driven by rising Treasury yields.
GBP
The recent decline in UK house prices did not have any impact on the market, even though it dropped by 0.1% month-on-month and rose by 5.2% year-on-year.
But in the next few months, activity and prices are expected to increase, if not retained, as the decision of the UK government to extend support for the labor market will be one of the main factors that would maintain demand for households.
With regards to the GBP / USD pair, growth will depend on 1.3860 as a break above it will certainly set-off a strong upward move towards 1.3930 and 1.4000. But if the pound drops below 1.3775, price will go to 1.3680, and then to 1.3570.
