In March, the US dollar has noticeably gained weight, but April began for it with a drawdown in relation to most of its main competitors.
The day before, the USD index dropped below 93.00 points on the back of increased risk appetite and lower Treasury yields.
Although the yield on US Treasuries is still at annual highs, after the speech of US President Joe Biden in Pittsburgh, at the far end of the curve, it began to noticeably decline, which was perceived by US stock market participants as a positive signal.
As a result of yesterday's trading, the S&P 500 index for the first time in history crossed the mark of 4000 points, starting the second quarter with a new record.
Investors generally reacted positively to the disclosure of details of the US President's plan to stimulate the national economy in the amount of $2.3 trillion. The project will be financed by raising the corporate tax rate, which creates an additional risk for shares. However, the new stimulus package should accelerate economic growth in the country, and market participants are still inclined to focus on this.
On Thursday, the greenback retreated from five-month highs, noted a day earlier in the region of 93.50 points. However, the sell-off of the American currency was very modest and, according to experts, is nothing more than profit-taking on the eve of Friday's payrolls.
Virtually all of the leading indicators published ahead of the NFP report indicate that it will be positive.
In particular, the ISM manufacturing index jumped to 64.7 points in March from 60.8 points in February, reaching its highest level since December 1983. The report also reflected the growth of the employment component.
The combination of optimism about the vaccine, the lifting of restrictions in several US states, and the aid program payments have undoubtedly boosted the national labor market. However, the main question is how strong this support was.
The US economy is projected to create 647,000 jobs in March. The unemployment rate should come down. At the same time, it is hardly worth counting on a significant increase in the average hourly wage.
Ahead of the publication of the US employment report, the dollar is under pressure, but this dynamics may change if the release really pleases market participants.
Sentiment on the USD has improved significantly lately, and many analysts believe that the dollar's rise to multi-month highs is likely to continue as more investors are betting that the US economy will grow stronger than other major economies and inflation expectations will force the Fed to act faster.
However, some focus on the fact that the Fed will not follow the lead of the market and will not raise interest rates. They believe that the outstripping growth of the American economy will sooner or later spur the growth of the entire world economy, and this will ultimately negatively affect the dollar exchange rate.
"We think the market is too skeptical about the US Central Bank's commitment to keeping interest rates low for a long period and tolerating inflation exceeding the 2% target. Greenback may weaken over the course of the year as the market will need to adjust its expectations for higher US interest rates," strategists at UBS said.
According to Commerzbank experts, expectations that the United States will outpace Europe in terms of economic growth may put pressure on the euro versus the dollar, but only in the short term.
"On the short-term horizon, downside risks prevail for the euro. However, the new stimulus package proposed by US President Joe Biden is likely to meet resistance in Congress as the country's budget deficit widens. And these are just two reasons for the weakening of the dollar in the longer term," they said.
Amid increased risk appetite, the EUR/USD pair was able to recover and consolidate above 1.1700. On Thursday, it rose for the second day in a row, up nearly 70 points.
The single currency was supported by a strong report on business activity in the manufacturing sector of the eurozone.
The final estimate for March rose to a record 62.5 points from 57.9 points in February.
On Friday, the main currency pair is trading in a narrow range, remaining below 1.1800.
Investors refrain from active actions in anticipation of the release of important macroeconomic indicators in the United States.
Despite the recovery of the EUR/USD pair from five-month highs in the 1.1704 region, gains remain limited due to concerns over an increase in COVID-19 cases in the EU and a slow rollout of vaccinations against the virus in the region.
An additional month of lockdowns could further delay the much-anticipated recovery of the European economy as the US economy rushes towards it in full sail.
In Europe, approximately 12% of the population is vaccinated against 30% in the United States.
Although the EUR/USD pair has managed to reach the levels it was last seen on Monday, it remains in a downward trend.
Only a pure breakdown of 1.1810 will aim the pair at 1.1880-1.1885 (the area where the 200-day moving average passes and the 61.8% Fibonacci retracement level relative to the November-January rally). Support is noted at 1.1760, 1.1700, and 1.1680.