The publication of important economic statistics last Friday, primarily on US employment, have a noticeable negative impact on the dynamics of the US dollar.
As expected, there is an unusual outlook. Previously, traditionally strong values of the number of new jobs objectively supported the dollar exchange rate, since the market reacted to these positive news with a certain buying activity of the US dollar. However, a completely different picture was observed this week. Strong news on the labor market puts pressure on the US currency.
What is the reason for such a behavior in the market and what to expect in the near future?
It was previously mentioned that the dynamics of the US dollar is strongly influenced by two main reasons. The first reason is negative, and can be associated with its weakness. In particular, it is caused by massive measures to support US citizens and businesses by various historically unprecedented stimulus programs, which turned the US dollar into a funding currency again, filling the global financial system with it. This is the strongest negative factor for the national currency, which continuously puts pressure on it.
The second one is a positive reason. Its essence lies in the fact that the dollar exchange rate was supported and in principle, continues to be supported by the expectation of a sharp increase in inflationary pressure in the United States amid all these support measures and economic growth, which will definitely force the Fed to start reducing the volume of government bond purchases in the future, and then begin the process of normalizing monetary policy. In other words, start raising interest rates. These expectations led to a sharp increase in the yield of treasuries, which was the reason for the strengthening of the US currency recently.
So why did the US dollar begin to decline?
We believe that the main reason was the suspension of growth in government bond yields and even the beginning of its correction, which is clearly noticeable in the dynamics of the benchmark 10-year T-Note. The yield tried to consolidate above the 1.7% mark, but it has not yet succeeded. Therefore, it was seen declining by 0.31%, that is, to 1.651% earlier.
Another reason is the growing demand for shares of companies and in general, for risky assets in the world, which also negatively affects the dollar exchange rate. It should be noted that the growth in demand is completely associated with investors' prospects, which showed a simple reaction. In addition, positive data on the US economy amid the Fed's assurances that it will not raise rates for at least another year is clearly perceived as a buy signal. This leads to a sell-off of the US dollar across the entire profile of the currency market.
Assessing the current mood of the market, we believe that the US dollar will continue its local weakening for now. The behavior of Treasury yields is an important indicator for this.
Forecast of the day:
The EUR/USD pair is testing the level of 1.1880. The breakdown of this level and consolidation above it in view of the continuing negative trends for the dollar, which can be confirmed by the publication of the latest minutes of the Fed meeting on monetary policy, may stimulate the pair's growth to 1.1945 mark.
The USD/JPY pair is trading above the level of 109.65. A decline below this level is likely to lead to its further decline to 109.00.