US dollar could extend recovery in Q2

After the long Easter weekend, today is the first full trading day of the week and volumes should be significantly higher than both Monday and Friday. What this means is that traders will be paying more attention to today’s price action as a guide for market direction. FX traders will be watching for signs of strength for the US dollar after a strong non-farm jobs report on Friday was followed by a good ISM services PMI report on Monday and a good showing from JOLTS Job Openings today. Meanwhile, the US Covid-19 vaccination rate is currently nearly five times faster than the global average, according to a CNN analysis.

After a solid first quarter, the US dollar has started the new quarter on the backfoot. However, the faster rolling out of vaccines in the US combined with the various government stimulus measures means the US economy should be able to recover stronger and faster than the rest of the world. As a result, the Fed should become hawkish faster, as it will probably have to combat inflationary pressures building in the economy faster than it currently expects. This should therefore be positive for the US dollar, especially against currencies where the central bank is expected to remain dovish longer, or regions where vaccines are being administered very slowly.

In Q1, the US dollar was supported above all by rising bond yields as investors speculated that the Fed would have to tighten its monetary policy sooner than expected as record stimulus measures would overcook inflation. The dollar was also supported by weakness in foreign currencies, especially safe haven currencies such as the Japanese yen and Swiss franc, while the euro also weakened noticeably as authorities there struggled to deliver the Covid vaccines. Haven assets sold off, along with government bond prices, as investors chose the racier equity markets and Bitcoin amid recovery hopes. For that reason, commodity dollars fared better, especially the Canadian dollar, which found additional support thanks to rising oil prices. The pound also did well, particularly in the first half of Q1 thanks to the UK’s rapid deployment of Covid vaccines.

EU’s Plan to Near-Virus Immunity by End-June too optimistic

But today, the euro rallied after Blomberg reported that most European Union member states will have sufficient Covid vaccine supplies to immunize the majority of people by the end of June. If correct, this would be much earlier than the bloc’s official target. Apparently, Germany, France, Italy, Spain and the Netherlands will all be in a position to fully inoculate more than 55% of their total populations, according to the projections in the document seen by Bloomberg. However, it remains to be seen whether the Eurozone will be able to meet this optimistic target. If the market also shares my doubts then the single currency should come under pressure again, leading to a potential drop towards $1.16s.

Source: ThinkMarkets and TradingView.com