Fed can’t hold the US dollar down

On Thursday, the US dollar recouped most of its losses against major currencies following the FOMC meeting. The Federal Reserve does not intend to raise interest rates until 2023, but the recovery in the dollar and rising government bond yields tell us that investors are still guided by an optimistic economic scenario. A rise in the Philadelphia Fed Manufacturing Index underpins the central bank’s improved economic outlook. The index jumped from 23.3 to 51.8, reaching its highest in the last 48 years. Month after month, we see the manufacturing sector contributing to the economic recovery, and the service sector will soon follow manufacturing. The Fed cannot contain the dollar, as mass vaccinations and direct payments to the population will be the key to a solid recovery in the second quarter and half of the year.

USD/JPY is under the threat of correction, but we believe that the sell-off will be short-term. The Bank of Japan did not begin to adjust the key rate, keeping it at the level of minus 0.1%. At the same time, the regulator intends to continue to buy back long-term bonds to maintain the yield on 10-year securities at a near-zero level. The central bank also announced its readiness to ease monetary policy as needed.

The recovery in the US dollar led to the first rally in the USD/CAD pair in eight trading days. Canada’s retail sales report is due Friday, and while the recovery in employment should support household spending, wholesales were weak. The USD/CAD pair is heavily oversold, and a negative release on retail sales could trigger an active recovery.

The Bank of England unanimously decided not to adjust the parameters of monetary policy, which led to the sale of the British pound. According to the statement, “The committee does not intend to tighten monetary policy at least until there is clear evidence of unused potential being tapped and reaching a 2 percent inflation target.” The dovish rhetoric clearly shows that the central bank is not even thinking about raising rates. It is worth noting that the pound reached more than a year’s high against the euro, despite losses against the dollar.

The Australian dollar was also among the “leaders” in Thursday’s trading. The employment report for February was very strong. More than 88,000 people found jobs last month, nearly three times the forecast. At the same time, the entire increase fell on the segment of full employment, and the unemployment rate fell from 6.4% to 5.8% (while economists had expected a moderate decline to 6.3%). Despite the cautious outlook of the Reserve Bank, there is no doubt that the Australian economy is strengthening, allowing the AUD to outperform all its competitors.

The New Zealand dollar has shown less confident results. In the fourth quarter, the country’s economy slowed by 1%, and the third quarter figure was revised downward. And although the economy as a whole is still doing well, the positive dynamics slowed down.

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