On the eve of the greenback's decline against its main competitors, including the euro, by almost 0.5%. In many ways, this was a continuation of Friday's trading: then the US currency showed a rather restrained reaction to the strong monthly report on US employment.
The dollar sank to weekly lows on Monday, even though the March report from the ISM reflected the highest indicators of activity in the US service sector in the entire history of observations.
The fact is that positive macroeconomic reports on the United States spurred risk sentiment in the markets. As a result, the protective greenback was under pressure, and key US stock indexes updated record highs.
The greenback continued to weaken on Tuesday. The USD index fell to 92.50 points, dropping to its lowest level since March 25. This happened less than a week after the US currency reached a nearly five-month high of 93.45 points.
According to some analysts, the greenback's decline this week may indicate that the momentum of the dollar's growth has been exhausted at the moment, since most of the optimistic forecasts for the United States have already been taken into account in the current USD quotes.
"While the United States does look exceptional in terms of economic recovery right now, the normalization of the COVID-19 situation in the world will mean that over time, the growth gap between the United States and other developed countries will narrow," TD Securities experts said.
"We believe that the current dollar exchange rate more than reflects the expectation of accelerated growth of the US economy. This means that there is room for a pause in the recent USD uptrend," they added.
However, not everyone agrees with this point of view.
Some analysts believe that the dollar's current retreat will be temporary. According to them, the US currency strongly rose in March, and profit – taking after such a powerful rally is quite common.
In particular, Westpac strategists see opportunities for the dollar's succeeding growth.
"The greenback has not yet benefited from the improved macroeconomic situation in the United States. Pullbacks to 92.00 points should be redeemed to rise to the highs of the third quarter of 2020 in the area of 94.50 points," they said.
The only major release of this week in the US, with the exception of yesterday's report on business activity from the ISM, will be the minutes from the March FOMC meeting.
Signs of a faster recovery in the US economy, along with an acceleration in vaccination in the United States, have raised expectations of rising inflation in the country and a rise in interest rates by the Federal Reserve.
The US central bank claims that it will keep rates at a near-zero level until at least 2023. However, the market believes that the Fed's policy is becoming more hawkish, and will look for confirmation of this hypothesis in the minutes from the last FOMC meeting.
Another unknown in the current equation is the fate of the U.S. infrastructure plan proposed last week by President Joe Biden.
Democrats expect the plan to be approved by Congress by July 4, U.S. Independence Day.
Progress in advancing the bill on new financial injections may remind the markets of the potential increase in inflation, and this may support the dollar.
Currently, the USD index is trading just above the 200-day moving average, which now passes around 92.40 points. Falling below this line will negate the bullish mood and open the way for the index to the area of 91.30-91.35, where the lows of March are located.
Thus, the dollar has yet to confirm its decline, and traders should wait for the corresponding signal from the EUR/USD pair.
In recent days, the euro has sharply strengthened against the US dollar, but this was largely due to the greenback's weakness and the euro's recovery from oversold levels.
The EU's COVID-19 vaccination campaign is expected to intensify in the second quarter. This gives the EUR/USD bulls some hope. However, promises by European officials to increase the number of vaccinations have been broken in the past.
Serious measures are still being taken in the largest EU countries to contain the spread of COVID-19, which puts pressure on the European economy and the single currency.
The ultra-soft monetary policy of the ECB, which has increased the speed of quantitative easing, also does not favor the strengthening of the euro.
The minutes from the European Central Bank's March meeting will be released on Thursday.
ING expects the document to focus on how broad the initial support for the Emergency Asset Purchase Program (PEPP) was, which has since seen a weekly increase in purchases to €19-20 billion, compared with the previous €12 billion.
In general, the EUR/USD pair's current recovery looks unstable, and at some point it may attract the bears' attention again.
The pair has been under the 200-day moving average since the end of March, which now passes near 1.1875. A breakthrough above will confirm the trend for growth and the pair will aim for 1.1980.
EUR/USD is expected to remain positive if it does not fall below 1.1740 in the next few days.
