The USD bulls are on a run to the north, after finishing last month in the green, which makes two consecutive; January and February. It has seen the US Dollar Index bounce some 2.55% off the worst levels produced at the start of 2021, since March 2018.
Price action at the get go of the year entered into a huge monthly demand area, where the USD bulls were able to previously kick-start a recovery some three years ago. It came on the back of large dollar selling from January 2017 until January 2018, with the price falling from similar heights in March 2020 until the recent stabilization.
Let’s take a note of some likely contributing factors behind this current USD move:
- Technical correction: The greenback dropped a chunky 13% from its highest levels in 2020, it was very one-directional. Markets at the time were becoming very much optimistic about the outlook for global economic recovery, as central banks were taking action and data was starting to improve. All of this was heavily weighing on USD, forcing the losses as described. Typically, the market will need to correct following such moves, seeing playing take profits etc.
- Fiscal stimulus / Inflation / FOMC: There are growing expectations that Biden’s incoming fiscal stimulus will spark a jump in inflation, prices of goods and services rising, which could force the central bank, FOMC, to act faster than they would like in terms of tightening monetary policy. Perhaps they may explore withdrawing some of their own stimulus, which would be viewed as a USD positive.
- Solid vaccination progress in the U.S: Optimism is increasing across the market around the U.S. economy, with the boost to be received from Biden, but also the progress being made with vaccinations. Market players' confidence will be restored in the world’s largest economy, which could see some more flows back into USD.
Despite all the above, markets appetite for risk has been very dominating, the intentions to buy the dips seen in riskier FX and assets in general remains evident. There is much focus on the global recovery, which does appear to be promising as demonstrated in key economic data points. Keeping this in mind, as per the previous USD article, rallies will remain vulnerable for the safe-haven.
Technical observations: USD index (DXY)
Price action via the daily chart view formed a bullish flag structure, which saw the bulls largely capitalizing on, smashing out of this in the session of Friday 26 February. There has been much momentum to the north since the breach, however a very key technical area stands in the way of greater heights.