It was a holiday in the US and several countries on Monday, which made the global trading session limited. On this wave, European stock indexes optimistically received American's optimism last Friday, while the US dollar remained under clear pressure.
The primary reason why investors behave like this lies on the widespread optimism based on expectations of a massive inflow of dollar liquidity due to new support measures, which are expected to be adopted by Congress at the end of this month. In addition, markets expect that the acceleration of the vaccination process in Western countries will strengthen the pace of economic recovery in countries and the world as a whole.
The currency markets continue to receive huge amounts of liquidity, which pushes up the demand for risky assets. In view of this, the US stock indices updated the previously reached highs once again. At the same time, crude oil prices extremely surged to the dock levels of the beginning of last year. In this case, optimism simply does not fade and continues to be generated by the generally positive corporate reporting of companies.
However, such investors' behavior is very risky. People simply disregard the negativity that is happening in the real economy of Western countries, and primarily in the United States, namely the COVID-19 pandemic, which continues to spread. The markets went uncontrollable. Investors are already trying to make money on the growth in the value of assets, which are only supported by extremely low monetary policy and unprecedented financial support measures, and nothing more.
On the wave of this market hysteria, the question arises: how long will it last and can a person really earn profit from it?
In terms of the dynamics of stock markets, we should focus not only on cheap company shares, but to those securities that have growth prospects amid the recovery of the world economy and the economies of those countries to which they belong.
As for the currency market, the US dollar is being supported by the continued strong growth of American government bond yields. The sell-off in the US government debt market remains. The benchmark 10-year treasury yields are firmly above 1.2300%. Against this background, the dollar as a whole manages to stay above the level of 90 points on the ICE index. Locally, only commodity currencies are clearly growing against it. It is supported by rising prices for oil and other commodity assets, which, in turn, are rising in the wake of expectations of a sharp growth in the global economy and accordingly, demand for these assets.
Despite such a market situation, we believe that the US dollar will generally remain flat against major currencies, as the growth in Treasury yields is the strongest factor supporting its rate.
Forecast of the day:
The EUR/USD pair is trading at the level of 1.2150. If it fails to break through it, it will most likely correct down to 1.2080.
The USD/JPY pair has almost reached the previous local high of 105.70. If market sentiment falls, it may turn and head towards 104.50 level.