In April, the USD index fell sharply, breaking through key short-term support levels and questioning the uptrend in the US currency observed earlier this year.
The greenback’s downfall became so threatening that it made his fans wonder if it was time to start worrying.
However, the dollar cannot remain in a depressed state for a long time, there is a rise in Treasury yields, and global markets are nervous.
“While US stocks are falling this week, the VIX is up 11%, jumping to an April high,” Bank of America said.
Indeed, there are plenty of reasons for concern.
According to the WHO, in almost all regions of the world there is an increase in the growth rate of the number of cases of COVID-19. At the same time, the most difficult epidemiological situation is noted in India, which has rapidly risen to the second line in terms of the number of people infected.
And again, not everything is going smoothly with vaccination. Following the safety concerns of the AstraZeneca vaccine, similar difficulties arose with Johnson & Johnson’s drug, which can cause thrombosis as a side effect. Although this phenomenon is extremely rare, it clearly does not add enthusiasm to investors.
As a result, sales and profit taking on long positions intensified on overheated markets, which had been demonstrating steady growth for several weeks in a row.
The dollar as a safe-haven asset has been given some respite as stocks rebound from record highs as coronavirus outbreaks from India to Canada have darkened the prospects for a fast global economic recovery.
The US currency also benefited from a rise in the 10-year Treasury yield, which surged from 1.528% (last week’s low) to 1.631% on Tuesday.
After touching the lowest levels since March 3, the greenback managed to attract buyers in the region of 90.80-90.85.
Amid a return to risk aversion and demand for the defensive dollar, EUR / USD failed to rally further and fell to 1.2000, while hitting multi-week highs around 1.2080.
One of the main events of this week is the next meeting of the ECB, the results of which will be announced on Thursday.
The EUR / USD rally has so far been supported by downward pressure on the dollar and a shift in investor attention to growth prospects in Europe after vaccinations in the region picked up steam.
“Traders would like to hear the ECB’s opinion on the outlook for the eurozone economy, namely whether the regulator’s forecast becomes more optimistic,” strategists at ABN Amro said.
The rate of introduction of the COVID-19 vaccine in the EU has accelerated markedly, especially in Germany and Spain, where the total number of people receiving the first dose of the drug increased by more than 50% in the first half of April. This gives hope that the eurozone economy will be able to get back on track in the second half of this year.
There are also growing expectations among market participants that the ECB will slow down the pace of asset purchases in the third quarter, which, along with improving growth prospects, will help lift bond yields in Europe and nudge the euro.
So far, however, the picture remains rather bleak. In October-December last year, the GDP of the currency bloc contracted by 0.7%. At the end of the first quarter of 2021, the eurozone economy is likely to show a recession again due to lockdowns in the largest countries of the region, which have practically not stopped since the beginning of the year. Two consecutive quarters of decline in GDP means falling into a technical recession.
Therefore, the most that can be expected from the ECB right now is a display of cautious optimism. Most likely, the regulator will slightly change its rhetoric and make it clear that the eurozone economy still needs monetary incentives.
The ECB decision on monetary policy will be published shortly before the release of data on business activity in the euro area, which is unlikely to please bulls on EUR / USD.
Given the recent spike in COVID-19 cases in the Old World and continued quarantine restrictions in some of the region’s top countries, it won’t come as a big surprise if the currency block purchasing managers’ indices declined in April.
The manufacturing PMI is forecast to fall to 62.0 points from the 62.5 points recorded in the previous month, while the services PMI will drop to 49.1 points from 49.6 points in March.
While some experts consider the current weakening of the euro to be a temporary phenomenon and expect the EUR / USD to resume growth in the direction of the recent highs, others believe that the main currency pair will soon return to decline and the downtrend started in January will continue.
At the moment, the EUR / USD pair is trading under the resistance of 1.2000-1.2030. A break below 1.1910 (200-day moving average) would push down to 1.1760 (78.6% retracement of November-January gains), and further down to 1.1705 (March low).
A break above 1.2030 is required to continue the rally. The next strong resistance is at 1.2080 (April high), followed by 1.2240 and 1.2350.