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The dollar index is declining in tandem with the retreat of US government bond yields. The 10-year yield continued its downward trend on Tuesday, sagging below 1.7% at the start of the Asian session from its peak of 1.776% last week. This is happening despite the improving economic outlook in the United States. Perhaps most of the optimistic forecasts have already been taken into account in the current quotes.
The current dollar level fully reflects the expectation of accelerated economic growth, so the recent upward trend may be suspended.
On the first trading day of the week, the dollar index lost half a percent against a basket of competitors. Today the USD hit its lowest level since March 25th. It is worth noting that the corrective reversal occurred less than a week after hitting a nearly 5-month high of 93.43.
Meanwhile, Goldman Sachs still expects the dollar to rise. A solid recovery in the US economy and high bond yields may support the US currency in the short term.
"After several unstable months, we are withdrawing our recommendation to sell the dollar," economists wrote.
Westpac strategists also see opportunities for further strengthening of the dollar. A number of strong data, in their opinion, "strengthens the fundamental basis for the growth of the dollar." The dollar basket index has yet to fully benefit from the impressive macroeconomic improvement in the country. Pullbacks to 92.00 points should be bought for growth to the highs of the third quarter of last year in the area of 94.50.
Goldman team members are also confident that opportunities to short the dollar may reappear as the pandemic improves in the eurozone. "Clear evidence that the Covid situation in Europe is under control is likely to require new guidance on shorting the dollar," economists wrote.
In this situation, the euro is quite capable of regaining lost ground and growing by 3% in the next three months. This means that the EUR/USD pair will again return above the psychologically important level of 1.20, and then go to the area of 1.21. Later, buyers can take the level of $1.28, but this will happen in about a year.
There are other factors indicating that the dollar's competitors are now in a position to take the lead. In the next two months, the US Treasury will increase the volume of dollars in the banking system through operations to redeem Treasury bonds. Further, this process will be continued or even intensified. On Tuesday, the US Department of Treasury will redeem $5 billion of securities, and on Thursday - $14 billion. The Fed is due to print nearly $14 billion this week to buy assets. Meanwhile, last week, a capital outflow of $117 billion was recorded.
On Monday, the euro closed above the level of 1.1780. Today the quotes continued to move upward. This should activate a bullish scenario, which means we should expect further growth in EUR/USD with a target of 1.1880 and above. At the same time, another fall under the 1.1780 mark will return the bears to the market, which will want to push the rate lower. This is unlikely, at least today.
Meanwhile, the pound rate dropped sharply against the dollar on Tuesday morning. The pressure on sterling may be because investors returned to the markets today after a long weekend and took advantage of the rally observed on the last day. Selling is probably a mixture of factors - taking profit and opening new short positions.
Meanwhile, market players are still optimistic about the sterling. On the buyer's side, the UK's rapidly expanding vaccination program. The introduction of the Moderna vaccine will begin in mid-April. On Monday, Boris Johnson confirmed that nothing has changed in plans for a faster economic recovery after the pandemic. All areas of the service sector will open their doors to visitors. The authorities are also considering creating vaccine passports. The Prime Minister also made it clear that from May 17, the system of international travel may begin to gradually improve.
Thus, buyers of GBP/USD will again aim at testing the psychological level of 1.40.
The day before, the GBP/USD pair returned to the bullish channel, which can activate the upward trend and wait for the pound to rise to 1.40 and 1.41. For the development of such a scenario, stability above the level of 1.3840 is important. If it is not possible to keep it, the pair will go down.
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