FX.co ★ Will the dollar rally continue?

It seems that last year's forecasts regarding the decline of the US dollar rate this year will not happen.

The growth of the US currency since this year began is not fully included in the forecasts proposed at the end of 2020. This means that they expect the national currency to be under pressure from fundamental factors such as the Fed's monetary policy, US Government's fiscal policy and J. Biden's expected new support measures. However, that did not happen.

What is the reason for this and what can be expected in the currency markets soon?

It was mentioned several times that the US dollar began to receive significant support amid an unexpected growth in the yield of US Treasury government bonds, which began to immediately rise in the first trading session of the new year. However, it should be recognized that the real smooth increase in profitability began in August last year after its strong decline in the wake of COVID-19. Thus, its current growth is most likely in the wake of the expectation that the Fed may decide to change its monetary policy approach this year.

These expectations are supported by high optimism about the efficacy of the COVID-19 vaccine. Earlier, investors were simply optimistic about the reports of its invention in Western countries. And although there was a slight adjustment in the sentiment this year, the market remains strongly confident that the coronavirus pandemic will be brought under control and eventually defeated within a year. Given this, investors in the debt market and sell treasuries believe that the changes in the FRS monetary policy are near.

On another note, the increase in Treasury yields pushes interest in the US dollar, contributing to its strength in the currency markets. But in relation to the main currencies, the dynamics of the ICE dollar index shows that it was trading in a sideways trend until the beginning of this week. Meanwhile, commodity and commodity currencies managed to hold their positions earlier. However, its strong growth is hindered by increasing oil prices and other commodity assets, which supports the commodity and commodity currencies but are still gradually weakening against the US currency. In this case, the euro, the yen, the franc and the pound show the strongest upward trend.

We believe that if today's US employment data turns out to be higher than expected, as was the case with the ADP new job report, the US dollar will continue to rise, which can result in a longer dollar rally.

Forecast of the day:

The EUR/USD pair remains under pressure and is trading above the level of 1.1950. We expect it to further decline to 1.1900 on the wave of positive employment data in the US.

The USD/JPY pair is at the level of 105.50. It is expected to further rise to 106.00 amid strong data on the number of new jobs.

It is fair to note that both trade ideas are related to a situation where positive data in America is released. But if they are weaker than expected, it will locally weaken the US dollar.