Where Are the Weak Points of the Currency Basket?

The U.S. Dollar is unlikely to have a big cause for a noticeable strengthening across the whole of the spectrum of the world's major currencies, since unordinary spikes in United States 10-Year Treasury bond yields up to the annual level of 1.75% have calmed down for a while to reach 1.6% during the Asian trading hours today. This happened despite the Federal Reserve's inaction and against growing inflation expectations. Nevertheless, some of the Greenback's competing currencies have found their own reasons to decline.
 
The British Pound seemed to react to another drop in the unemployment figures, which showed a change in the number of employed people  by 147,000 over the past month, or to be more precise, in the statistical format represented by the three-month moving average. This data was published in the UK on Tuesday morning, March 23. Immediately after that, the Cable broke down the psychological support of 1.3775, which seemed to serve as a protective measure against further depreciation over the past six weeks. Even a synchronous increase in average earnings by 4.8% year-on-year, or by 4.2% excluding bonuses, did not help the Pound to stay at least on the next lower order. So, GBP/USD fell below 1.37 at the very beginning of Wednesday's trading session, and then it suffered once again due to the lack of confirmation of any inflationary pressure in the British Isles.
 
The so-called "core" consumer price index (CPI), which measures the changes in the price of goods and services, excluding food and energy, came out at 0.9% only, year-on-year basis, thus repeating the lowest level of consumer inflation since 2015. The similar readings in January, and also the highly expected level this time, was at 1.4%. The producer price index (PPI) was 0.6%, month by month, both on input and output data. "The sharp fall in CPI inflation in February reflected clothing retailers slashing prices, because the lockdown has left them with excess stock. Prices will snap back, as they have after previous lockdowns. No reason to doubt that CPI inflation will be c.2% by end year," said analyst Samuel Tombs at Pantheon Macroeconomics.
 
All this may suggest more chances of expanding monetary stimulus from the Bank of England (BoE), including the asset purchase program, or at least for keeping such policy parameters unchanged for a longer period of time. This is fine as a reason for subsidies to real business or households and maybe even a driver for the economy as a whole, but it may also undermine the position of the national currency.
 
The further ability of the British currency to recover to 1.40 or beyond is now in great doubt. When a similar level near 1.37 was passed down in April 2018, as a result, GBP/USD fell to 1.2660 in the following several months. Of course, it is not possible to extrapolate that such kinds of development could become inevitable now, but much will probably depend on the reaction to the UK retail sales figures next Friday. Solid purchasing managers' indices (PMI) were also presented today, which amounted to as much as 57.9 points for the manufacturing sector and 56.8 for the service sector of the British economy. These are high values, but so far they have only led to a dead-cat bounce up to the 1.3730 area.
 
EUR/USD also dropped to the 1.18 area, for the second time in March, nearing a four-month low. Worries about a third Covid-19 wave may push traders to prefer other currencies than the Euro for now. Germany, being the euro zone's largest economy, extended quarantine measures again until April 18 and introduced some new restrictions to curb the rise in corona infections. A jump in cases of the virus in continental Europe, where vaccination is still going extremely slow, are still the obstacles to resume travelling and local businesses in the region. Some European countries, including France, have previously extended their lockdowns too.
 
The negative bond rates in the Old World and tensions with China are also seen to be weighing on investors' sentiment. The EU Foreign Affairs Council earlier decided to introduce restrictive measures under the sanctions regime for the alleged human rights violations against some Chinese personalities and their affiliated firms. In response, the Chinese Foreign Ministry decided to apply the mirror-like restrictive measures against a number of EU representatives. That was the first time that Europe joined the sanctions against Beijing. All this hardly speaks in favour of a big sell-off for any European assets or the Euro, of course, but it contributes to the uncertainty surrounding early economic recovery. So, the risks to test the 1.16-1.17 levels for EUR/USD are on the table.
 
Meanwhile, the Kiwi hit a three-month low at 0.6965 after the New Zealand government introduced new special taxes to prevent more speculation on the real estate market. It was not just a move to allow the central bank to hold general interest rates lower for longer, with less risk of a property market bubble, but also a reason for many investors to refrain from further investments to the very hot and popular housing sector of the country. This led to a decrease in potential demand for the New Zealand Dollar, which was reflected in the reduced quotes for NZD/USD. Many in the market are afraid of similar actions in neighbouring Australia to diminish the interest in real property purchases in Melbourne and Sydney, which caused a lagging decline in the Australian Dollar as well.
 
Both movements could still be considered, perhaps, as one-time marker reactions, and only a further technical pattern of a slide or recovery to previous positions at the charts may give more grounds for any plans for the mentioned two currency pairs. Foreign demand for relatively high-yielding bonds of Australia and New Zealand, as well as less damage from the virus for this region, may serve as the basis for a possible new growth in quotes, while improvements may be restrained by limited trade relations with more virus-battered countries.
 
It's also interesting that other commodity-related currencies, including the Canadian Dollar or the Mexican Peso, generally look quite resilient in relation to their own risk factors, for example, to lower oil prices. Each of the listed currencies has declined by no more than 2-2.5% over the past few days, which generally shows not so much the average strength of the U.S. Dollar in the market, but rather the weakness of individual elements of the alternative currency basket.