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U.S. Dollar rallies remain vulnerable to a bear attack

By Ken ChigboForexFeb 17, 2021 16:14
uk.investing.com/analysis/us-dollar-rallies-remain-vulnerable-to-a-bear-attack-200457567
U.S. Dollar rallies remain vulnerable to a bear attack
By Ken Chigbo   |  Feb 17, 2021 16:14
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The USD has been through very choppy price action over the past few weeks, as market players battle with fundamental themes and their meaning for direction of the greenback. There has been a boost in trading today, after a much stronger than expected U.S. retail sales report.

It comes after earlier this week having been forced down to the lowest levels seen in some three weeks, via the DXY as appetite for riskier assets has been gathering pace across the market.

Given the rollercoaster of movement at present, let’s break down the timeline of direction for the greenback so far this year and the influential factors:

At the start of 2021, the USD managed to find stable footing after the heavy beating encountered through 2020, particularly the back-end of the year. It was a much-needed technical correction, following the drop of some 7%.

Fundamentally, there was some support and focus on U.S. bond yields, which were spiking higher. USD was rising with this jump in US yields, in anticipation of the big-spending to be conducted by Joe Biden, which will spark inflationary levels to pick up and in turn, could force faster action by the FOMC. Note also that higher yields make the currency more attractive to income-seeking investors.

Why does the rally remain vulnerable?

There isn’t one particular reason in my view, but rather a few fundamental points to consider:

  • Vaccine roll-out optimism - Key economies such as the UK, US, and now recently Australia as well as New Zealand, all rolling out with strong plans if not already, for mass vaccinations. It has been largely encouraging for market sentiment, as the thoughts here are that normalization can start to be seen again with economic reopenings.
  • Poor labour market data: Earlier in the month the U.S. reported a very lacklustre number in the Non-Farm Payrolls report. The data raised some doubts about the pace of economic recovery in the country.
  • Dovish commentary Fed Chair Powell - In a recent speech, he stressed still-high unemployment and reiterated that the central bank’s new policy framework could accommodate annual inflation above 2% for some time before hiking rates. In other words, easy policy is going to stay there for a long, long time, and that should be negative for the U.S. dollar.

What next for USD?

I still believe that any near-term USD upside will be cut short and the sellers will look at moving in on these rallies. It is important to note the points raised by Powell, the FOMC will be far behind every other major central bank. In addition to global optimism and risk appetite that is still favoured by the markets, which weighs on USD as a safe-haven.

Riskier currencies will remain attractive on any dips that are presented in my view unless anything drastically shifts in terms of market focus.

U.S. Dollar rallies remain vulnerable to a bear attack
 

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U.S. Dollar rallies remain vulnerable to a bear attack

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