The dollar tried to rise on Wednesday and managed to partially regain its recent losses, but then it retreated from local highs near 92.25 points.
Players refrain from being active ahead of the auction of 10-year treasuries and the vote in the House of Representatives of the US Congress on the next package of fiscal incentives.
In the period from January to March, the yield on 10-year US government bonds rose from 0.95% to 1.6%. This jump was primarily driven by inflationary expectations. Many investors believe that the rise in commodity prices will lead to a further increase in price pressure in the country. This, in turn, may force the US central bank to review monetary policy and begin to wind down incentives earlier than expected.
Consumer prices in the United States rose 1.7% year-on-year and 0.4% month-on-month in February, according to data released today.
For investors, the main risk now is an increase in the annual rate of the CPI index to the level of 2%. If this happens, the pressure on government bonds and stocks in the United States will be significantly higher.
If the CPI index exceeds the level of 2%, the situation on the US stock market may deteriorate radically. This will benefit the defensive greenback.
The auction of the US Treasury Department for the sale of 10-year treasuries worth $38 billion is held on Wednesday. Players track the profitability of these securities to determine the next steps.
There is a chance that the demand at the auction of 10-year government bonds will be as low as at the auction of 7-year bonds, which will lead to an increase in the yield of treasuries and the USD exchange rate.
At the same time, the House of Representatives will vote on the program of assistance to the US economy proposed by President Joe Biden, after which the bill will have to be signed by the president himself. Previously, this program was one of the factors of increasing the yield of treasury securities and the growth of the dollar, but its adoption is most likely already embedded in the quotes.
Since the beginning of the year, the greenback has strengthened by more than 2%.
BCA Research experts explain the growth of the US currency for the following reasons.
"First, the dollar was heavily oversold. At the same time, the net speculative position on the USD was very short, and the sentiment on the US currency was close to a record bearish. Thus, a rebalancing of the positioning was to be expected. Second, the rise in (market, real) interest rates in the US has increased the attractiveness of the dollar, especially against currencies such as the euro. Finally, the economic momentum in the US has improved recently compared to other Big Ten countries, " they noted.
Many analysts still expect the dollar to weaken over the course of this year, but the speed of its recent rise has forced some to adjust their views.
Westpac strategists predict that the greenback will reach 94.50 points before resuming last year's downward trend.
"The dollar will continue to grow until the Fed introduces a tool to control the yield curve of the treasury, which will be the beginning of a long-term decline in the USD. From this point of view, the next meeting of the Federal Reserve, scheduled for March 16-17, will be important, during which the views of the regulator on the situation on the bond market may be announced, but until then the central bank will maintain the status quo, " Bank of America analysts say.
Take note that not only the United States has faced an increase in government debt yields.
The ECB will hold its next meeting on Thursday. The European regulator, unlike its American counterpart, has much more reason for dovish rhetoric.
It is unlikely that the central bank will decide to fix the yield curve on state bonds, but any hint of this step in the future may negatively affect the exchange rate of the euro.
In the context of an empty economic calendar for the euro zone, players on Wednesday keep an eye on the yield of treasuries, but the latter is kept near the closing levels of Tuesday.
After yesterday's fall and subsequent recovery from new annual lows near 1.1830, the EUR/USD pair spent almost the entire day at 1.1900, trading in a narrow range.
The steady yield of treasuries led to the consolidation of the main currency pair. In addition, investors prefer to remain cautious ahead of tomorrow's ECB meeting.
Strong support for EUR/USD is located at 1.1835 (2021 low). This is followed by 1.1820 (the level where the 200-day moving average passes) and 1.1760 (78.6% correction for the November–January Fibonacci rally).
Meanwhile, rising above 1.1970 will mean that the pair can aim for 1.2030 and 1.2115.
