USD Recovery Continues

The recovery in the US Dollar is continuing this week, albeit at a slower pace. With risk sentiment souring slightly in the face of vaccination concerns, the Dollar has attracted better safe haven inflow of late. The Dixie was helped further this week by the latest statement from the Federal Reserve.

Fed On Hold

At the Fed's January FOMC meeting which concluded yesterday, the central bank held its monetary policy unchanged, as expected. In the wake of the recent downturn in the labour data and consumer spending, among others, the fact that the Fed wasn't seen taking a dovish shift, was broadly interpreted as Dollar positive.

Activity Has Moderated

The Fed did note that “The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic". However, Fed chair Powell said that the bank was monitoring "progress on vaccinations" which offers the hope of a return to normal later in the year. The Fed has previously cited its projections for a strong recovery in H2.

Need For Fiscal Support

The Fed also reaffirmed its message of the need for further support from the government to help bridge the economy. With president Biden currently working on pushing through his $1.9 trillion fiscal stimulus package, the Fed was widely expected to remain in wait-and-see mode for now.

Asset Purchases To Continue

In the meantime, the Fed said that it will continue its current programme of $120 billion worth of monthly asset purchases until "substantial further progress" is seen, though the Fed remains vague on what this substantial progress would look like.

In all, the meeting offered little in the way of new information though, the lack of any dovish shift, means that the USD recovery has room to continue in the meantime, dependent on incoming data.

Technical Views

DXY

The Dollar index is holding above the 90.50 level into the back end of the week. While above here, there is room for a further run up to the 91.74 level and the channel top. However, in light of the longer term bear trend, the current move is still viewed as corrective and risks of a return to downside remain, with 89.36 the first support to watch.


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