22.02.202115:28 Forex Analysis & Reviews: What will the dynamics of the dollar depend on this week?

The US dollar suffered losses on all fronts at the end of last week, as the stock market was recovering from the sell-off the day before. On Monday, the US dollar cut losses amid rising Treasury yields to 8-month highs. It is worth noting that facts such as mass vaccinations, expectations of accelerated economic growth and inflation put pressure on the dollar. At the same time, this becomes a consequence of the growth in the yields of US government securities, which contributes to the growth of the dollar. Thus, traders are dealing with facts that have a double effect on the dollar, depending on the situation and mood in the markets.

The dollar index was recovering today to the level of 90.5, but the growth was rather fragile and short-lived

Investors focused on positive statistics last week, ignoring negative data. Manufacturing activity continues to grow, despite lockdowns and an as yet unconquered pandemic. Markets hope that the positive performance will not only continue but will improve as the vaccine spreads and quarantine measures ease. This week, the focus will be on the Fed chairman's semi-annual report to Congress. Jerome Powell is expected to talk about the economic situation and monetary policy.

Powell has repeatedly said that the central bank does not plan to raise rates or curtail the volume of the asset repurchase program in the near future. At the same time, he positively assesses the pace of economic recovery, expecting an acceleration in growth in the second half of the year. Upbeat forecasts coupled with a stimulating monetary policy are fueling sentiment in equity markets and fueling high beta currencies, putting pressure on the US dollar. This week, the dynamics of the financial market may depend on the reaction of traders to the optimism from the Fed officials.

Although the dollar has already dropped significantly, analysts recommend continuing to bet on selling it. On Monday, the dollar updated multi-year lows against the sterling, as well as the currencies of Australia and New Zealand. Ahead of this, the pair AUD/USD and NZD/USD, renewed their highs from March 2018. Investors continue to focus on vaccination progress and are betting on economic recovery from the pandemic.

The pound sterling remains above 1.40, which it crossed last Friday. Buying the sterling remains a priority as Prime Minister Boris Johnson announced his readiness to lift lockdowns, and traders hope vaccinations will lead to a recovery in the British economy

The relief that the UK managed to avoid a no-deal Brexit further supports the sterling, and the declining concerns about the introduction of negative rates in the country are also playing on its side.

Currency strategists recommend long positions on the pound, as well as on the Australian dollar. The AUD/USD pair "continues to benefit from the outperformance due to the upbeat global growth/reflation outlook, which is helping to improve Australia's terms of trade," MUFG Bank wrote.

The euro remains stable, trading at 1.2130 against the dollar. The focus is on the survey of sentiment in Germany and the speech of ECB President Christine Lagarde, who is expected to give a "soft" speech.

The dynamics of EUR/USD, according to analysts, will depend on the difference in the growth rates of the economies of both countries.

"Where the euro goes in the medium term depends on whether the American economy can indeed show a stronger post-pandemic boom than Europe," banking analysts write. If so, the single currency could suffer in the first half of this year.