After hitting record highs, key US stock indices entered the consolidation mode in anticipation of new drivers in order to continue the upward trend.
The US economy seems to be expanding at a faster pace. This allows investors to be optimistic about the prospects for global economic growth. At the same time, they note that there are still reasons for caution. Risk factors include volatility in the US debt market and an increase in the number of coronavirus cases in the country.
On Tuesday, the 10-year Treasury yield fell to 1.656% from 1.738% a day earlier.
On Monday, the United States reported more than 78,000 new COVID-19 infections, according to Johns Hopkins University. The Wall Street Journal estimates that the seven-day average of reported infections has been above the 14-day average, signaling that cases are edging higher in some places.
Investors also fear that accelerating US inflation could force the Fed to raise interest rates earlier than anticipated.
The situation in the foreign exchange market is similar.
The euro/dollar pair is moving near its 2-week highs.
The current week is not the best time for the US currency. Over the past three days, the greenback has fallen in price by more than 1%, dropping to 92.2, the lowest level since March 23.
Increased risk sentiment and the fact that US Treasury yields had slipped, moving further away from a 14-month peak, exerted downward pressure on the dollar.
According to Saxo Bank, the gradual lifting of coronavirus restrictions in the United States is causing an explosion of economic activity in the country. "What's the story there? Sell the rumor, buy the fact? Or is the flattening of the longer end of the yield curve more an expression of that anticipation that the pace of improvement may not get any better than it is at present and that the key question will be whether there is any further ability for the economy to surge in the wake of the sugar high of the latest round of stimulus checks and the last few rounds of acceleration as the last areas fully emerge from Covid restrictions in the coming few months. The intent with the next round of stimulus, the political signals suggest, will be offset with new taxes," strategists at Saxo Bank said.
"In any case, the combination of strong risk sentiment on these numbers together with no new upside pressure on yields has helped the US dollar get weaker. For the US dollar to get weaker still, we need an extension of this environment, or for the real yields elsewhere (and likely the nominal as well) to pick up more sharply in relative terms," the bank added.
In January-March, the US currency gained in value by over 3.6%, posting the strongest quarterly gains in three years.
State Street Bank suggests that following the strong USD rally in the last quarter, some investors started to reallocate assets, and they probably needed to sell dollars to rebalance their portfolios.
Due to the partial reduction in long positions on the US dollar, the euro/dollar pair managed to climb to the levels of March 23.
The EU has revised its outlook for vaccination in the region. Most Europeans are expected to be vaccinated before the summer season begins.
The International Monetary Fund has revised its economic growth forecast in the eurozone upwards - to 4.4% from 4.2%.
At the same time, slow vaccine rollout and tighter quarantine restrictions in Eupore leaves the region "a couple of months" behind the US, the IMF representatives noted.
Moderna has informed the German authorities that it is forced to postpone the next delivery of the vaccine.
What is more, the EU's immunization program is heavily dependent on the AstraZeneca vaccine. At the same time, several European countries announced that they would halt the use of AstraZeneca vaccine.
Although the euro/dollar pair was able to recover from 5-month lows, there are still risks of its decline.
"The downside risk for the Euro does remain if we get another round of US yield rises," SaxoBank noted. "Only a proper souring of the forward outlook or a nasty global deleveraging would seem able to push the euro below perhaps 1.1600-1.1500. At the moment, we would need a solid pull-back toward 1.2000 to neutralize this latest sell-off wave, a bit of a steep wall to climb," the bank added.
Europe might overtake the United States in case it speeds up its coronavirus vaccination programmes. However, it is clear that the EU will not be able to solve the current problems so easily.
Given that the United States will soon surpass the eurozone in almost all indicators, including job recovery and GDP growth rate, market participants should not pin all of their hopes on the euro. The European currency will hardly be able to hit its January high of $1.2300.
According to analysts at ING, as long as the coronavirus situation in the eurozone remains challenging, and the US economy is recovering amid a rapid rollout of Covid-19 vaccines across the country, the potential for the euro to strengthen against the US dollar is limited.
Apparently, a rebound in the main currency pair was mainly due to the weaker greenback and the lack of major fundamental factors.
On Wednesday, the minutes from the March Fed meeting will be released. This could make the market volatile and show how sustainable the euro's growth against the US dollar is.
If this data reflects growing optimism among Fed policymakers, this could be perceived by investors as a hint of an earlier increase in interest rates. As a result, the US dollar may advance.
"Any (even mild) hawkish signal surely bears the risk of hitting Treasuries, and providing some support to the dollar," strategists at ING said.
The minutes from the Fed meeting may shed light on the regulator's attitude to the threat of accelerating inflation, given the previously approved fiscal stimulus worth $1.9 trillion. The document may also show details of discussions among FOMC representatives on the asset purchase program.
The euro/dollar pair is currently trading near 1.1900, testing the key 200-day moving average near 1.1880.
Strategists at UOB Group did not expect the price to reach the 1.1870 level yesterday. However, the subsequent rally in the euro/dollar pair exceeded their expectations as the pair climbed to 1.1877. According to them, the next major resistance is located at 1.1945. The outlook for the pair remains positive while it is trading above 1.1770. The nearest strong support is at 1.1820.