After a two-day rally and touching five-month highs in the 93.50 point area on Wednesday, the US dollar corrected against its main competitors, retreating to the 93 point area.
Apparently, the dollar "bulls" decided to take profits ahead of Friday's payrolls.
Nevertheless, according to the results of the first quarter of 2021, the greenback grew by almost 3%, having managed to win back about half of the losses in 2020 and demonstrated the best dynamics since the second quarter of 2018.
At the start of this year, the bearish position on the USD was almost unanimous in the market. Vaccine optimism, reflation, and its warmed up appetite for risk were the main reasons for selling the US dollar, as better opportunities were thought to emerge elsewhere as the global economy revived.
However, the picture for the dollar changed and sparkled with new colors in January, when US Treasury yields began to rise. The trigger for this was the runoff elections in Georgia, which brought the Senate under Democratic control, paving the way for another massive fiscal stimulus package.
Against this backdrop, there has been a staggering shift in market participants' assessments of who will be the fastest to emerge from the pandemic. The yield on 10-year US government bonds soared to pre-pandemic heights. The indicator has almost doubled since the beginning of the year and significantly exceeded similar yields in other developed countries. This has made it harder for investors to bet against the dollar and has begun to build on the likelihood that massive fiscal stimulus and successful vaccinations will help the United States lead the global recovery from the pandemic.
On Wednesday, US President Joe Biden announced his long-awaited new plan to stimulate the national economy worth more than $2 trillion.
This news caused a rather restrained reaction from the dollar.
Analysts believe that such a large government investment will spur economic growth in the United States.
However, President Biden's efforts are setting the stage for another party clash in Congress, where lawmakers are divided over the overall size of the package and the inclusion of programs traditionally viewed as social services.
This leaves a lot of uncertainty about what the final plan will be.
In addition, the project will be financed through an increase in the corporate tax rate. This means less issuance of US debt, which is positive for bonds, the fall in yields of which will put pressure on the dollar.
So far, the greenback is trading near multi-month highs, showing the strongest monthly gain since November 2016 in March.
"Although the growth of the dollar is likely to slow down, the trend towards its strengthening is still preserved," experts from Sumitomo Mitsui Bank said.
According to experts, the US currency may rise if the key report on the US labor market exceeds expectations.
It is assumed that Friday data on US employment will show an increase of about 650,000 jobs in March.
At the same time, economists admit that real numbers may even exceed the 1 million mark.
The growth of the USD index has stalled around 93.50 points, facing strong resistance.
A clean breakout of this area will allow the dollar to develop an upward trend in the direction of 94.25–94.30 (the area where the November 2020 highs are located).
Meanwhile, attempts to continue the downward correction are likely to be held back by the 200-day moving average at 92.50.
Friday's employment data may also provide more clues as to whether the Fed will change its current course.
Although the US Central Bank claims that it will not raise interest rates until at least 2023, the derivatives market sees the likelihood that a change in the regulator's rhetoric will begin at the end of next year.
There is one important consideration when it comes to where yields will go after the worst quarter for US government bonds since 1980: The Fed has made it clear that it is not going to try to suppress them, unlike its foreign counterparts.
At the same time, the difference in the approaches of the American and European central banks remains clear and significant, which promises to further strengthen the dollar against the euro in the near future.
Since the beginning of the year, the greenback has appreciated against the euro by about 4%.
In less than three months, the EUR/USD pair fell by almost 6.5 figures, sagging from three-year highs near 1.2350 to five-month lows around 1.1704, marked the day before.
The number of COVID-19 cases in the eurozone continues to rise. The threat of overloading the French healthcare system forced President Emmanuel Macron to introduce a month-long quarantine after Italy and other European countries. Germany may be next in line.
Thus, the European economy runs the risk of not returning to an upward trajectory in the second quarter, thereby depriving investors of reasons to buy the euro.
Although the EUR/USD pair found a local "bottom" at 1.1704, the subsequent rebound was stopped at 1.1750-1.1760.
On Thursday, the euro is trading in a narrow range, changing hands. The 1.1700 support level still looks vulnerable to breakout.
Bearish pressure on the pair is expected to ease after the 200-day moving average breaks out near 1.1860. In the meantime, sellers remain in control of the situation, leaving the door open for a new visit for EUR/USD to the lows since the beginning of the year.
"Growth expectations for the US economy continue to strengthen, and the United States may provide quite a few strong macro statistics in the near future, including the NFP report. The rise in Treasury yields has already driven the spread of German 10-year bonds widening by 200 basis points. Therefore, we believe that the EUR/USD pair may well renew the five-month lows in the lower part of the 1.1700-1.1600 range," strategists at Westpac noted.
