22.03.202123:57 Forex Analysis & Reviews: Powell's speech, the yield curve... Whose music should the dollar dance to?

The Federal Reserve's regulatory measures and monetary policy decisions have caused confusion in financial circles. It seems that some investors are only now beginning to realize the implications of the central bank's new approach to inflation. The yield on US government bonds rose by almost 10 bps to 1.73% last week. The rising yields appear to be a kind of request to the Fed's management team to clarify their plans.

This week, the Fed's speeches are scheduled for Monday, Tuesday and Wednesday. The central bank is expected to clarify the policy course, but it is unlikely that financial officials will be able to dispel some investor fears and existing misunderstandings about the Fed's plans. Representatives of the US central bank, as you know, are not allowed to specify the target levels of inflation and rates.

However, the upcoming speeches of Fed Chairman Jerome Powell may correct the yield curve of treasuries. It all depends on whether the Fed wants it to.

The greenback will be in the spotlight this week. Today, it is adjusted downwards. The dollar index lost 0.16% at the beginning of the US session and was quoted around the level of 91.7.

A negative factor for the dollar may be the Fed's decision to stop some easing for banks. This means that from March 31, they will switch to the pre-pandemic mode. The reaction of the financial sector to this judgment was negative.

The greenback has other reasons for the decline. The overnight rate on the interbank lending market in New York is 0.01%. This suggests that the banks have a significant overabundance of dollar liquidity. At the same time, the Fed's latest statistics on currency swaps of the US central bank with other major banks indicate that there are no problems with dollars in foreign markets. The liquidity surplus is fixed both inside the US and outside of it, which will negatively affect the pricing of the greenback.

The euro may bounce back. The EUR/USD pair opened Monday's session with a downside, but this did not stay for too long. At the moment, traders are dealing with a reversal. The 1.1970 mark plays an important role here. If it is broken up, the euro will go further up. The weakness of the euro buyers and the inability to overcome this barrier will force a return to the bearish position. In this case, the further target of the decline will be the 1.1780 mark.

It is worth noting that traders have reduced their long positions on the euro to the lowest level since June 2020. At the same time, the dollar's appeal has increased amid higher US government bond yields. Big speculators, like hedge funds, have dramatically rethought their attitude to the US currency. Now they are betting on its growth for the first time since November.

"The strengthening of the dollar over the past two months has been driven by rising treasury yields, and it seems that these trends are strengthening. We expect further closing of short positions in the US currency," the currency strategists write.

As for the pound, purchases of this currency now look attractive. Vaccination in the UK is progressing well. Last week, the country recorded a record daily rate of those vaccinated against the coronavirus. By mid-summer, all of the Brits will be able to pass the first stage of vaccination. This will strengthen investors' hopes for faster economic growth in England.

The growth and stabilization of the GBP/USD pair above the 1.3910 mark will return the bulls to the pound and send it further up. Otherwise, we will have to wait for a decline with a target of 1.3765.