The US dollar continues to lead the market: Fed's head, Jerome Powell, did not stop the strengthening of the US dollar, instead it indirectly contributed to its further revaluation. During his speech yesterday, he was not concerned about the growth in the yield of treasuries. This rhetoric allowed the dollar bulls to show character again, strengthening all over the market. In particular, the dollar paired with the euro, pushed through the support level of 1.2000 and settled in the area of 1.19 level. Buyers of EUR/USD broke through the key price level, allowing sellers to develop a downward trend. Now, if the price does not return above the level of 1.2000, after today's release of Nonfarm, the pair will clearly decline to the range of 1.16-1.18, where it traded last fall – from September to November.
Generally, the Fed Chairman voiced quite "dovish" rhetoric, which mostly should not act as an impulse for the US dollar's growth. However, his rhetoric became a "missing piece in a puzzle" considering the current situation in the markets (both in the currency and stock and debt markets). Initially, he did not talk about how the US Fed controls the Treasury yields. And when asked to comment on recent trends, Powell responded that the growth in government bond yields was very noticeable. At the same time, he added that the FRS in this context evaluates "a wide range of financial conditions", and not by one indicator. Investors liked such actions, after which the yield on 10-year securities surpassed the 1.5% (high since January 2020) mark again. It was followed by the US dollar index, which updated its three-month high to reach the level of 91.70. The configuration of the main dollar pairs has also changed accordingly.
It is worth noting that the buyers of EUR/USD held their positions for a long time, counting on the reliability of the support level of 1.2000. The pair has been above this target since the end of November, and all sellers' attempt to decline did not end successfully. Now, it is also impossible to say with certainty that the bears will hold their positions, as there are still Nonfarm data. But at the same time, it can be admitted that the USD received another trump card in the form of the Fed's position.
The market has developed a somewhat ironic situation: contrary to the "dovish" rhetoric of the Fed representatives (not only Jerome Powell), there is a general opinion among investors that the US regulator will be forced to curtail QE ahead of schedule and raise the interest rate. Here, the yield of treasuries acts as a kind of indicator of these sentiments. The dollar, in turn, was caught between two factors: on the one hand – Fed's dovish position and weak macroeconomic reports, while on the other, the general confidence of the market that the US economy will recover in the second half of the year amid the COVID-19 vaccination, implementation of the 1.9-trillion "American Rescue Plan" and Americans' overactive consumer activity. Given the dynamics of dollar pairs, it can be concluded that the US dollar has made a bet on the implementation of the second option. Meanwhile, Mr. Powell voiced the usual rhetoric, but did not talk about any specific time frame relative to the action of QE and low interest rates. Nevertheless, he made it clear that the regulator will not try to reduce the yield of treasuries in the near future, increasing the volume of purchases of treasury bonds.
Several experts stated that the increase in the yield of treasuries is primarily due to inflationary expectations. A report from Bloomberg, which estimates that consumers around the world have accumulated $ 2 trillion 900 billion during quarantine restrictions, also contributed in this context. At the same time, about half of these funds (about one and a half trillion), were accumulated by American consumers, including through several rounds of direct financial assistance. According to experts interviewed by Bloomberg, these savings will help the US economy recover faster after the coronavirus downturn. Against the background of the COVID vaccination campaign, consumers will actively spend their accumulated funds on goods and services (shopping, tourism, capital purchases, etc.). Such conclusions only added to the overall optimistic scenario regarding the future of the US economic recovery.
It is clear that everything that is happening can be considered as a "big bubble": if investors' expectations do not coincide with reality (i.e. with the real dynamics of macroeconomic indicators), the US dollar will sharply collapse, as it is rising now. But at the moment, the national currency continues to gain impulse on expectations of an earlier tightening of the Fed's monetary policy parameters.
From the point of view of technical analysis, EUR/USD bears managed to breakdown an important support level of 1.2000 (lower line of the Bollinger Bands indicator on the daily time frame) and is currently trying to consolidate in the area of 1.19 level. Despite the dollar's general leadership, short positions on the pair still look risky: the downward impulse has clearly faded, and today's Nonfarm data can calm the dollar bulls.
Therefore, it is currently suggested to take a wait-and-see attitude, at least until the release of the US labor market growth. If the pair returns above 1.2000 level after its results, correction can be considered by opening longs to 1.2050 (lower border of the Kumo cloud at D1). Alternatively, if the Nonfarm is on the USD side, it will be best not to hurry on making trade decisions least until Monday.