Markets have calmed down after the April meeting of the US Federal Reserve. Besides, the end-of-the-month factor for the US dollar will soon lose its importance. So, what shall we expect from US currency in May?
So, the US economy is recovering, with the GDP rate accelerating to 6.4% in the first quarter year-on-year. However, it should be noted that these results were reached only thanks to monetary stimulus. It is hard to argue with this and with the fact that the recovery is rather fragile and uneven. Jerome Powell argues that the acceleration in inflation is temporary. It looks like the Fed has finally quenched the market's hopes for a speedy reduction of the asset purchase program and a rate hike. If there are any changes in policy, they will take place no earlier than 2023. Markets have no choice but to believe him. This is indicated by the dynamics of the Treasury yields and inflationary expectations.
It is a well-known fact the mood of market players changes quickly. After the markets completely calm down following the Fed's meeting, investors and analysts will start looking for new reasons for the alleged tightening of the monetary policy. Even now there are all sorts of rumors going on. Some investors are betting that the changes will take place in July. Others say that Jerome Powell will announce the end of the asset-buying program at an economic symposium in Jackson Hole. Thus, by September the market may adjust its rate expectations.
So far, all this is no more than information noise that will not help the US currency in any way. The US dollar has only one way to move and the trend remains bearish. The bearish comments from the Fed have strengthened the position of the US dollar. The greenback may continue to grow only within a correctional movement. Otherwise, it has no other opportunities, at least in the short term.
If we look at the soft policy of the US regulator more broadly, it becomes obvious that the central bank is making the dollar the funding currency in the markets and is causing the US trade deficit to grow. In March, trade deficit reached a record 90.6 billion. On the other hand, such dynamics can serve as a driver for faster growth of the economy and markets of developing countries.
Markets are afraid that the monetary policy will be back to normal too quickly, and Powell is unlikely to confirm their fears. The lack of signs of an imminent rate hike supports the upward momentum in stocks due to moderate pressure on the national currency.
On the last day of April, the dollar is gaining ground as the downward effect from the Fed meeting is probably offset by the end-of-the-month factor and short-term profit taking. USD may lose support by the end of the next week and will feel the potential pressure.
The US currency can make an attempt to rebound if the jobs report for April exceeds expectations. An increase of 1 million or more will support hopes that the US can compensate for the loss of 8.4 million jobs sooner than expected.
If it fails to take advantage of the potentially strong employment data and the topic of the US macroeconomic success fades away, the greenback may easily test the lows from February. Analysts say a deeper pullback of the US dollar index is highly likely, with the nearest target at 90.00 and then at 89.65.
Amid a bearish trend in the US dollar, EUR/USD moved above 1.2100 but did not stay there for long. On Friday, the euro lost in value. The correction can be explained by the monthly movements in the capital cycle. However, it is not all that straightforward. The euro may easily remain under pressure.
Optimism about the accelerated rate of the vaccination process in Europe is good, but it has already been priced in. The superiority of the American economy over the European one again comes to the fore. The US economy once again showed the maximum growth in the first quarter, while Germany's GDP, which is the catalyst for growth throughout Europe, contracted 1.7% in the first three months of the year.
This means that the decline of the pair from 1.2100 can hardly be a signal to buy the pair on a price fall. It is important to remember that the euro is a currency with a large army of supporters who can suddenly start buying it when the opportunity occurs. So you need to be ready for this.
If EUR/USD settles above the support level of 1.2064, it will be possible to adhere to the bullish scenario. After a rise to 1.2170, further growth is possible to the level of 1,2300. The trading range on Friday is expected to be in the area of 1.2064-1.2220.
As for the US dollar, we are not talking about a trend reversal yet. Nevertheless, an asset like the US dollar, which is backed by such a strong economy, cannot fall forever.
On Thursday, it received a slight boost from the publication of GDP data. It should be noted that the economy lacks 1% to reach the pre-pandemic level. Treasury yields reacted to this data with growth. However, the current uptrend is to a greater extent connected with the end-of-the- month factor. As indicated above, at the beginning of May, this factor will exhaust itself. Yet, this does not mean that the greenback will not find new stimuli to grow.
In this regard, we shall have a look at the rating of the current US president. In the first 100 days of Joe Biden's presidency, the S&P 500 rose by 11%. This is an undeniable success for many decades. Under Donald Trump, for example, the index rose by 5.3%, and this was a good result, since the average growth is considered to be around 3%.
The majority of the market is bullish towards stocks. There is one detail to consider: the securities of many tech companies are overestimated. If the yield of the government bonds continues to rise, the stock index will go into correction, returning demand for the US dollar.