Another leg of USD rally took place yesterday amid sell-off in US equities. The bout of risk aversion was fueled by the comment of the US Treasury Secretary Janet Yellen that a rate hike may be needed to prevent economy from overheating. The caused market turbulence in various asset classes, including stocks and USD, revealed lack of trust of investors to the Fed comments, showing that the Fed pledge to keep rates low and the stance on inflation (“we see inflation as temporary factor”) are taken with a grain of salt. Yellen later clarified that her comment was not a recommendation or a forecast for an interest rate hike, which is not surprising, because just a week ago we saw very cautious Fed rhetoric regarding rate hikes. Fed Speaker Charles Evans' speech today is likely to address market rumors sparked by the Yellen remark.

The last three upside swings in USD were distinguished with length of the waves getting progressively shorter, while meeting resistance at the two-week high of 91.40:

Such a price action, together with the stabilization of ATR and RSI near their averages, often precedes a breakout move. Taking into account the pressure of buyers its vector will likely be positive. The breakdown catalyst is expected to be the Non-Farm Payrolls report on Friday.

Two other reports to look out for are the ADP US Job Growth Data and the ISM Service Sector Index. They will play an important role in shaping expectations for the NFP. The ADP is expected to point to an increase in jobs of 850,000 in April, while the ISM index is expected to rise from 63.7 to 64.3 points. Particular attention should be paid to the hiring component of the ISM index, as its predictive power in relation to the NFP report is quite significant. The two strong reports also once again could cast doubt on the Fed's ability to maintain current degree of monetary easing, which, in particular, may result in faster growth in long-dated bond yields. As I wrote on Monday, news and data flow this week favors tactical strengthening of USD as the reports on the US economy take central place in the economic calendar this week and risks are shifted towards positive surprises in the data.

For EURUSD, the breakdown of lower border of the trend channel disabled it for some time, but there was no particular rush to sell near the critical 1.20 level as seen from little pressure in RSI:

In this regard, the level can equally act as a foothold for growth after completion of the correction. The 1.1950 test on the release of US statistics looks like a logical scenario, but let’s not forget what drove the recent strengthening of EURUSD - progress in vaccinations, European fiscal stimulus and economic data. Next week, the news background is expected to be more favorable for the growth of the European currency.

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