I have many times written that the US dollar won’t rise on the US strong domestic data in April like it did on weak reports in March. In March, the major growth driver for the greenback was the Treasury yields rally. However, the US debt market was overvalued at that time. It is high time the situation stabilized, which the EURUSD bulls have taken advantage of.
It would seem that an impressive employment increase by 916,000 in March and the strongest growth in the ISM services PMI since the record began in 1997 should have discouraged the US dollar bears. However, as I expected, the market has revealed its true nature – the Treasury yield hasn’t increased, while the S&P 500, on the contrary, has hit a new all-time high. An increase in the global risk appetite usually puts pressure on safe-haven assets, such as the greenback. Therefore, the EURUSD bulls managed to test level 1.18.
Dynamics of US services PMI
Source: Bloomberg
Some analysts suggest that the purchasing managers’ indexes and employment data are not strong enough to force the Fed to consider any moves towards monetary normalization. Furthermore, Federal Reserve Bank of Cleveland President Loretta Mester said the better-than-expected March payroll report was “great” but not great enough, so the Fed is willing to be patient. But how could it be better!
In my opinion, the Treasury yields are not growing because investors doubt the adoption of Joe Biden’s $3-$4 trillion fiscal stimulus by Congress. The aid project should be paid for by the tax rise, which the big business behind the legislators is not willing to accept. Eventually, the Treasuries issue may not be as sizable as it was expected, and the US economy may not be growing that fast.
It is incorrect to compare March hand April, also because of the epidemiological situation in Europe. Therefore, those who try to act according to the former principles could fall into a trap. For example, Goldman Sachs recommends closing USD shorts versus commodity currencies, as firm U.S. growth and rising bond yields may keep the greenback supported over the short term. The majority of Forex traders share this opinion.
Dynamics of USD speculative positions versus major currencies
Source: Bloomberg
I believe Goldman Sachs and others, sharing the same opinion, could fall into a time trap, missing the start of the EURUSD uptrend. However, Goldman is still quite bearish on the dollar medium- and long-term outlook. The bank suggests the euro should be at $1.21 and $1.28 in 3 and 12 months, respectively.
Monthly EURUSD trading plan
As I noted earlier, it is too early to be optimistic about the euro and too late to be pessimistic. The EURUSD is likely to be consolidating in the range of 1.17-1.195, and it will be relevant to sell on the price rise and buy on the price fall.
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