The dollar ended the prior week with the worst performance as short-term bearish sentiment persists. The rebound in the first quarter should have ended, and the main question is whether it is ready for new lows. This is indeed in favor of the general sentiment about risk has not been stifled by some unexpected event.
In other markets, forex was mixed, with the euro and yen gaining the most, but both failed to break out of the range, except the US dollar. A new decline is seen in dollars as we enter a new week. The euro raised earlier high business activity indices. But in the new week, it can be replaced by the yen. Moderate risk aversion in Europe keeps the yen afloat.
EUR/USD settled near 1.2100 as the single currency ignored the cautious ECB, which was also supported by hopes of a revitalized immunization campaign in the Union in the next couple of months. The dollar fell on Friday amid prevailing risk appetite. Wall Street rallied after upbeat PMIs from Markit for the EU and the US, with most of the indexes hitting record levels, raising hopes for a quick recovery from the pandemic downturn. USD/JPY remained bearish and traded at 107.50, undermined by the mild tone of US government bond yields.
While the dollar’s weakness is evident, developments in other currencies are relatively mixed. The euro has become the strongest thanks to the strong PMI, rather than the dovish indicators of the ECB. President Christine Lagarde spoke confidently as progress in vaccination should “set the stage for a strong recovery in economic activity during 2021.” Medium-term risks also remained “more balanced”.
Speaking of the yen, although it was the second strongest last week, the growth dynamics were not very convincing, except for the dollar. AUD/JPY bounced back after first testing support at 83.02. A break at 83.02 is likely to see a deeper drop through support at 82.27. However, a strong bounce from the current level followed by a break at 84.70 would instead retest the 85.43 high.
Since the start of the pandemic, Japan has used a different lockdown model in an attempt to contain the spread of Covid-19. Hard restrictions are not permitted by Japan’s constitution, so the government uses its powers to declare a state of emergency to restrict movement and recommend that businesses and individuals comply with virus regulations. This alternative approach has allowed the economy to remain largely open throughout the limited outage pandemic.
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