Dollar in a State of Recovery, Fed’s Policy Outlook May Increase Yields Again

Dollar in a State of Recovery, Fed’s Policy Outlook May Increase Yields Again

The decline in Treasury yields was the key reason for the US dollar’s weakness for much of April. Strong US economic growth in the coming quarters, market expectations of a federal fund rate hike, and the Fed’s QE cutback strategy may increase the Treasury yields and help the dollar once more. Given the potential for monetary policy divergence, we expect minimal growth in the EURUSD pair.

The latest data suggests a stronger-than-expected recovery in the US. In addition to more non-farm jobs and higher retail sales, consumer confidence jumped to its highest level in 14 months. The Conference Board’s consumer confidence index rose to 121.7 in April from 109 in March. Meanwhile, the index of the current situation rose over the month by +29.5 points to 139.6, while the index of expectations rose by +1.5 points to 109.8.

“Consumers were more optimistic about their income prospects, possibly due to improved labor market conditions and the recent round of incentive reviews.” Meanwhile, “holiday intentions have grown significantly, likely due to accelerated vaccine introduction and further easing of restrictions on the pandemic.” In addition, property prices jumped by a record 12.2% y/y in February.
Federal Reserve – Most Recent Monetary Policy Statement
The central bank kept rates unchanged, as predicted, and vowed to keep quantitative easing going until “further substantial progress” on jobs and inflation is made. Chief Powell clarified that it was too soon to consider a reduction.

US stocks closed in the red, although the S&P posted a daily record high. Losses were uneven, with the DJIA having the worst results. US government bond yields rose early in the day but closed with moderate losses. The yield on 10-year US Treasuries peaked at 1.66%, ending the day at 1.60%.

The EU Parliament finally voted in favor of the Brexit trade and security deal, receiving 660 votes in favor and just 5 against. The ratified deal provides the basis for London’s new relationship with the 27-member union, despite continuing tensions between the two sides. The UK has not fully complied with some of the agreements, while the gloomy mood is also due to the delay in the supply of the AstraZeneca vaccine to the Union.

EUR/USD hit a fresh April high of 1.2134, holding nearby. GBP/USD rate exceeded 1.3950. Commodity-pegged currencies also rallied, with USD/CAD now approaching the 1.2300 thresholds.

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Author : Azeez Mustapha

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Azeez Mustapha is an experienced author, trader, markets analyst, signals strategist, and funds-manager.