The USD rally continues to gain impulse. On Tuesday, the US dollar updated a four and a half month high, rising above 93.3 points.
It should be noted that local consumer and business sentiment has improved and economic activity in the country has accelerated due to the impressive COVID-19 vaccination program in the United States.
By April 19, approximately 90% of Americans will be able to receive the coronavirus vaccine in accordance with Joe Biden's set target. By May 1, 100% of Americans should be vaccinated.
Such news is encouraging for the dollar bulls. Looking at their US employment report in March, they hope to see signals of an even faster recovery in the labor market in the coming months.
At the moment, the US dollar is receiving support from the growth of the yield on US government bonds, which is rising amid inflationary expectations and hopes for an economic recovery in America.
On Tuesday, the indicator for 10-year treasuries surpassed the level of 1.77% again. It was last seen at this level in the middle of the month, and before that, only in January 2020.
The US dollar's current strengthening is caused by investors that started to put higher inflation in the quotes, which may prompt the Fed to raise interest rates.
However, some experts argue that the growth of the US currency will be temporary, as it is not guaranteed that consumer prices in the US will sharply increase over a long period, and the Fed will tighten monetary policy earlier than previously expected.
JPMorgan Chase said that investors are looking at the massive trillion dollar stimulus, as well as the ongoing vaccination campaign, and conclude that US interest rates cannot stay low for long without inflation spiraling out of control. At the same time, they warned those who expect a rate hike as early as 2022, noting that the market has almost always been wrong about the Fed's plans for the last 13 years since the global financial crisis.
They believe that the US Central Bank will start raising rates no earlier than 2024.
Currently, the futures on the federal funds rate considers its price growth by almost 0.25% by the end of 2022 and by 0.75% by the end of 2023.
According to strategists from Rabobank, the market is fairly optimistic about the upcoming US employment report. Therefore, the dollar will most likely find strong support. However, the market may be in danger by pricing in too much inflationary risk. This means that there will be a chance that the US dollar will weaken for the next few months.
In the meantime, the US dollar continues to dominate against its main competitors, as the higher yield on 10-year Treasuries, compared to other developed countries, increases the attractiveness of the US currency.
The national currency has already reached its highest levels since last November. With the absence of technical issues, it can continue rising up to the area of 93.50–94.00, where the correction level by 61.8% on the Fibonacci relative to the decline in May-January, passes.
The USD outlook will remain constructive as long as it is trading above the 200-day moving average near 92.50.
On the contrary, the Euro currency is still one of the outsiders in the currency market.
A potential tightening of measures to contain the coronavirus in France and Germany has concerned the short-term outlook for the European economy. At the same time, the widening spread between the 10-year US and German government bond yields has increased pressure on it.
The French authorities are considering the possibility of tightening quarantine in the country. German health officials have warned that the third wave of COVID-10 could be the worst, forcing officials to consider imposing a nationwide curfew.
Moreover, it will take time for Europe to catch up with the US relative to the vaccination issue. For the time being, the region will feel the consequences of the growing number of cases of coronavirus and full-scale months of quarantine. Therefore, it is only a matter of time for European macroeconomic statistics to deteriorate. As soon as the final estimates of Europe's PMIs for March are released in early April, they are likely to be revised downward.
Experts from UniCredit believe that the rising number of coronavirus infections and additional restrictive measures in the eurozone could hinder the Euro to rise against the US dollar in case of any improvement in risk appetite in the near future.
They said that although most of the positive news for the US dollar has already been accounted for in quotes, the outlook for the euro remains unstable in the near future.
In this case, the rate of decline in the EUR/USD pair accelerated after the breakdown of the 200-day moving average near the level of 1.1860.
The current situation is still controlled by sellers. In the short term, a deeper decline to the area of 1.1700 can be expected. After that, significant support levels may emerge within the area of 1.1600 – November 2020 lows.
