FX Market View #12

The FED is continuing its path of buying US treasuries even as the economy is expanding, and the vaccine rollout is helping to open businesses. Last month’s disappointing jobs numbers diminishes any likelihood of a change in this fiscal policy. Furthermore, any pricing pressures that may be developing as still considered in being transitionary by the policy makers. These are all important factors as we look to evaluate what is driving the Dollar, with interest rates maintaining their current levels. In the meantime the Dollar movements are more reactionary to the small intraday changes in US yields, following its gains and consolidating when the yield unwind.

Looking further ahead though, the FED reluctance to readjust their policy along with the data supporting a growing economy limits the Dollar’s climb. The US economy has clearly moved on from the initial impact of the pandemic over a year ago, and this expansion leads to inflationary pressures and expectations as economic demand is rising. During the middle of last week the Dollar followed US yields higher following the unexpected rise in CPI data, however these positions were quick to unwind days later. The Dollar Index has been unable to break through its support levels of the past 3 months, and further consolidation seems likely if not welcomed.

As parts of Europe observed a national holiday on Monday, the key reports for the week begin with the German business sentiment index. Similar data will also be release in the US with the consumer confidence index and new home sales. The opening of economies with the increased number of vaccinations will likely confirm the existing growth trend. On Wednesday, the central Bank of New Zealand might hint as some policy tapering which will be supporting of the New Zealand Dollar. Heading into the weekend, investor attention will return to US data with the release of during goods for April as well as unemployment claims.

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