Markets continue to balance between risk sentiment and bond yields, tensely awaiting further moves from leading central banks.
The US Senate approved a $1.9 trillion stimulus package over the weekend, which is expected to be passed by the House of Representatives and approved by US President Joe Biden this week.
Although the approval of the bill can give a powerful boost and significantly accelerate the recovery of the US economy, there are concerns that rising inflation in the country will force the Federal Reserve to act more decisively on the issue of raising interest rates.
The Fed says that rates will remain at a record low until at least the end of 2022. However, investors doubt the central bank's ability to hold rates in the face of accelerating inflation. They fear that rising rates will slow the economic recovery and hinder the full employment that the central bank is targeting.
The report on US inflation for the previous month will be published on Wednesday. In the context of the February jump in oil and gas prices, the growth of consumer prices in the United States may exceed the market forecast of 0.4%. This scenario can push the greenback to new highs.
On Tuesday, the USD index reached its highest level since the end of November last year, rising above 92.5 points, but then corrected to 92 points.
The pressure on the safe dollar was primarily exerted by an improvement in market sentiment against the background of the fact that the Organization for Economic Cooperation and Development (OECD) revised up its forecast for global GDP growth for the next two years.
The OECD expects the global economy to accelerate by 5.6% in 2021, compared with the December estimate of 4.2%. The forecast for next year is improved to 4% from 3.7%.
Global GDP is expected to return to pre-pandemic levels by the middle of this year.
Another factor weighing on the dollar is the decline in the yield of 10-year treasuries, which may be related to the statement of US Treasury Secretary Janet Yellen that the United States has the tools to fight inflation. The former head of the Fed is considered an authority on monetary policy, so market participants take her word for it.
The greenback retreated from its 3.5-month highs as U.S. Treasury yields stabilized. However, the auction of 10-year US government bonds worth $38 billion, scheduled for Wednesday, will give some indication of how stable the market is.
"Stability is likely to remain the topic of the day ahead of the UST auctions and the release of US inflation data tomorrow, which pose short-term risks to the foreign exchange market," ING strategists said.
The EUR/USD pair started the current week with a drawdown, falling for the sixth time in the last seven trading days. On Tuesday, it was able to recover, finding a local bottom near 1.1835.
In general, the respite in the rally in treasury yields and the decline in EUR/USD looks like a temporary phenomenon.
Dovish rhetoric from the European Central Bank, which will announce its verdict on monetary policy on Thursday, may lead the main currency pair to new four-month lows.
The ECB has reason to worry given the low rate of vaccination against COVID-19, the prolonged quarantine and the growth of government debt yields in the EU. According to analysts, at this stage, there is no doubt that the eurozone economy will lag behind the US in terms of the pace of recovery.
"The latest data indicates a continued decline in net long positions for EUR/USD. This points to a fragile short-term picture for the single currency ahead of the ECB meeting. The main currency pair risks falling to 1.1800 and 1.1750, " UniCredit experts said.
