There could be a feeling that USD corrective rally has run out of steam. The index bounced off 93.50 level on Thursday as details of Biden spending plan prompted upward corporate earnings revisions, which in turn fueled advance of risk assets, oil made controversial rebound on the OPEC decision and Treasury yields retreated. However, in my view, the main USD uptrend still remains valid:

Let’s look at the arguments.

The key argument here is the struggling euro. It has the largest weight in the Dollar index. Europe have some serious issues with the vaccination program, and is forced to resort to a rough method of fight - lockdowns. Social restrictions stifle economic activity and cause grievous harm to the economy. It’s hard to imagine that situation will change in the near-term and the idea of that US economy will continue to outperform EU economy in terms of recovery pace will remain dominant in the EURUSD.

The second argument is, of course, the growing difference in the level of fiscal stimulus. In the EU, the EU recovery plan is stuck in the German constitutional court, and in the US, the Biden plan is likely to be passed through Congress with minimal changes. Fiscal stimulus will certainly boost corporate performance of companies, in particular, expected revenues, as well as reduce uncertainty, so there is reason to believe that the rotation from European ETFs to American ones will intensify. This will also affect EURUSD.

The Fed's position relative to the far end of the yield curve is the third argument for the continued growth of the dollar. The Fed has made it clear that it will not interfere with long-term rates from rising. This week, the 10-year Treasury yields renewed their local maximum high, climbing to the highest level since January 2020:

Given the latter, there is no reason for a trend reversal. For the dollar, this is definitely a signal for growth, because, firstly, the attractiveness of Treasuries increases, and secondly, the carry trade becomes more expensive as USD funding becomes more expensive.

The ISM US Manufacturing Index rose from 60.8 to 64.7 in March. The new orders component jumped to 68 points, which suggests that US expansion is not only gaining momentum, but will also perform well next month.

Next week, we can see the dollar index move to 94.00, and EURUSD to 1.16, especially if today the NFP meets expectations, and the Treasury yields start to rise again next week (most likely scenario).

As for the economic calendar, next week will be stingy with events due to the holidays. The Fed meeting minutes and the ECB's PEPP asset purchases will be the main sources of valuable information for the market.

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