Dollar continues to rally against other world currencies, except the British pound, which might undergo an upward correction soon. However, growth will occur only if demand for the dollar declines and the yield on US bonds stabilizes.
Yesterday, US bonds declined after the Senate passed the long-awaited $ 1.9 trillion bailout bill. 50 senators voted in favor of the package, while 49 voted against. Democrats want the bill to be approved by March 14, when many programs that support the labor market end.
But despite that, the yield on 10-year US Treasuries still returned to yearly highs amid hopes for faster economic growth and higher inflation in the future.
US Treasury Secretary Janet Yellen also remarked that problems lie in the labor market, because according to her calculations, real unemployment is beyond 10%, which is at odds with the latest nonfarm payrolls report.
Last Friday, the US Department of Labor reported that the number of people employed in the nonfarm sector rose by 379,000 in February, which is much higher than the expected 182,000. This sharp increase is directly related to higher employment in the leisure and hospitality industry. The smallest gains were recorded in healthcare, social services, retail trade and manufacturing. The unemployment rate also fell to 6.2% this February, from 6.3% a month earlier.
This discrepancy between Yellen's statements and real data makes investors trust their observations more. As a result, demand for the US dollar rose, in the hopes that interest rates and monetary policy will change much earlier than expected.
Of course, no one doubts that central banks helped save the global economy from the coronavirus crisis. But now, they are tackling the hardest part: managing recovery amid disagreements with investors. Many believe that the COVID-19 vaccines, as well as continued fiscal support from the government, will set off a faster economic recovery. In particular, they expect inflation to rise very rapidly, which could lead to a revision of monetary policies much sooner than projected.
However, heads of the leading central banks unanimously insist that they will continue to adhere to super-soft policies for quite a long time.
So when can we expect a decline in the US dollar and increase in risky assets?
In the next two weeks, the Fed, ECB, Bank of England, Bank of Japan and Bank of Canada will meet, during which they will discuss and most likely reiterate the above promises in an effort to ensure that their labor markets will recover and avoid the mistake of winding up stimulus programs. Back in 2008, central banks made decisions too early and too quickly, which led to imbalances in the financial market and undermined the confident recovery of economies.
Last week, the European Central Bank maintained a moderate pace of bond purchases, ignoring the rise in bond yields. It bought bonds worth € 11.9 billion, which is quite similar to the amount it purchased a week earlier. Yield on 10-year bonds in Germany dropped by 0.29% after the publication of this data.
This Thursday, the ECB will meet to discuss the outlook for the European economy. It may also announce an increase in the bond purchase program to correct the situation in the bond market. If this happens, the euro may strengthen, so do not rush to sell the currency at current price levels.
With regards to macro statistics, Germany published a rather disappointing report yesterday, but it should not be interpreted as a signal that the country's economic recovery is over. The data said industrial production fell by 2.5% in January, which is a huge contrast to the expected 0.2% increase.
On the bright side, investor confidence in the whole Euro area points to a clear improvement in sentiment. A Sentix poll said it rose to 5.0 points in March, from -0.2 points a month earlier. This is the steepest rise since February 2020 and suggests that economic recovery in the bloc continues. As for the current conditions index, it reached a yearly high of -19.3 points. The expectations index, meanwhile, increased to 32.5 points.
Today, data on Germany's foreign trade will be published, followed by revised quarterly reports on the EU GDP. Exports are forecast to fall by 1.2%, while imports are projected to decrease by 0.5%. A report on Italy's industrial production last January should also be published.
As for the EUR/USD pair, it is too early to talk about an upward correction, although the upcoming meeting of the ECB might increase its likelihood. For a start, the bulls need to regain control over 1.1885, as such will lead to an increase towards 1.1935. Further growth to the 20th figure will depend on a consolidation above this range. But if the bears break through 1.1835, EUR/USD will drop to 1.1790 and 1.1750.
