The dollar was under pressure due to lower government bond yields. The improvement in market sentiment also strengthened the sell-off of the USD index. The IMF raised its forecast for global economic growth, in particular, it improved its assessment of the rise in US GDP. The optimistic estimates came after strong data on the labor market and the index of business activity in the service sector. The enthusiasm of investors supports Joe Biden's statement about the need to accelerate the pace of vaccination. American adults must be vaccinated by April 19.
As hopes for a quick economic recovery after the pandemic are growing, investors are beginning to show greater risk appetite, which leads to a decrease in defensive assets like the US dollar.
The focus of the markets today will be on Jerome Powell's speech at the IMF panel discussion. It is expected that the head of the Fed will be optimistic about the prospects for economic growth. At the same time, he will also focus on the plans of the Central Bank to adhere to the ultra-loose policy course. In this situation, the demand for risk may increase, and the dollar will continue to bear downward dynamics.
Another important factor playing against the dollar is its authority among the world Central Banks. Judging by recent data from the IMF, the share of the US currency in world reserves has reached its lowest in the last quarter of a century. There is a decreasing trend from quarter to quarter. Therefore, the current dollar sales look quite logical. What we are seeing now may be the beginning of a downward trend for the dollar in the long term.
When the dollar is really convinced of the unchanged course of the Fed's monetary policy, it will feel the strongest pressure. ING believes that this will happen in early summer.
Greenback continues to lose value on Thursday. The decline may intensify during the American session if Fed officials agree that monetary policy should remain very flexible, despite the improved economic outlook.
"Rising inflation in the absence of signs of imminent rate hikes will further exacerbate negative US real rates and, coupled with a global recovery, should put pressure on the dollar," analysts write.
The FOMC report released yesterday also dampened fears of early withdrawal of credit support measures, thereby whetting risk appetite.
How to perceive the current decline from the point of view of technical analysis
In the course of the current downward trend, the dollar rate against a basket of competitors fell below the 200-day average, an important signal line of long-term trends. At the end of March, it managed to cross this line upwards. As we understand, the holiday did not last long, the dollar quickly lost its momentum for growth, which indicates the weakness of buyers.
In this situation, a trader needs to pay attention to several signals. After falling below the 200-day moving average, the index may move by inertia for some time, so we can see further downward movement.
It will be more prudent to wait for the victory, and both the sellers of the dollar and the buyers may be the winners. Fluctuations around an important trend line are often false.
Over the past two years, there have been about ten such episodes. It is worth noting that after a minor dip below the 200-day average, the dollar returned to gains, gaining support from the bulls on these declines. A decisive breakdown of the trend was observed last May, followed by a collapse of the dollar index by 8%.
If the current bearish greenback expectations remain true, then in the coming months it will be possible to see the return of the dollar index to the area of the annual bottom near the 90.00 mark.
What will the euro say?
The euro has certainly taken advantage of the dollar's weakness by recovering some of its losses. On Thursday, the pair traded without significant changes, traders were waiting for important statements from two major world Central Banks. In addition to Powell's speech, today, the European regulator published the report of the last meeting. It will provide more information on the trajectory of asset purchases under the monetary policy program.
There are no important economic publications on Thursday, so the ECB's data on asset purchases under the Pandemic Emergency Purchase Program (PEPP) set the tone for the debt and foreign exchange markets. The regulator will announce how many assets were purchased during the week. If the ECB once again confirms that it does not plan to deviate much from the original targets, the euro may strengthen significantly.
Although the dollar is under pressure from the Fed, concerns about the prospects for a recovery in Europe could negatively affect the euro, turning the rate down again.
The EUR/USD pair failed to hold above the 1.1885 level. Consolidation of quotes below this level suggests that a downward correction movement with the target of 1.1780 is possible. At the same time, growth and consolidation above 1.1885 will reintroduce bulls into the game, which will send the euro close to the resistance of 1.1950.