Dollar up, Dollar Down

It’s been a fairly volatile week for USD with the Dollar Index rallying off the initial lows of the week before reversing and trading back into negative territory on the week. This continues the recent run of choppy price action we’ve seen in the Dollar as the market struggles to get a firm grasp on direction.

Treasury Yields Lifting Dollar

On the one hand, the Dollar is being supported by the continuing bullish rally in treasury yields. Yields on the 10 year and 30 year notes have been rising steadily since summer 2020 and have recently been boosted by increasing inflation expectations. The surprise jump in January retail sales this week helped drive the Dollar higher once again. Retail Sales came in at 5.3% in January, well above the 1.2% forecast, adding further support to the view that the US economy is rebounding well. However, these data-induced gains were short lived with the Dollar reversing almost as quickly as it spiked once the data had been digested. With the spending largely attributed to the $600 stimulus cheques sent out by the government, the result was seen as temporary for now.

Inflation Expectations

Inflation expectations have been lifted of late as a result of the firm progress being made within the US vaccination effort. With the US leading the world in vaccination numbers, and with Biden promising that vaccines will be made available to all US citizens by July, traders are looking ahead to a return to normal. With expectations of a spending surge once restrictions are lifted, particularly over the summer season, inflation is expected to rebound firmly. This has been reflected in the uptick in treasury yields recently, with some players speculating that, should inflation rise aggressively, the Fed will need to begin scaling out of its current easing approach well ahead of schedule.

Fed To Allow Inflation To Run Hot

However, the Fed itself has downplayed these inflation fears, backed up by the treasury secretary (former Fed chair Janet Yellen). While some uptick is expected, the Fed has offered reassurance that it will be looking through any temporary increases (to some extent) and will give the economy room, allowing inflation to run a little hot.

While there is upside pressure, USD still remains heavily depressed against last year’s highs against its major trading counterparts meaning that it would take quite an abrupt increase in inflation to start to drive USD firmly higher. For now, the USD uptick continues to be viewed as a correction, though upside risks are building.

Technical Views

DXY

The Dollar index turned lower just ahead of testing the bear channel top and is now once again back below the 90.50 level. While below here, the market is vulnerable to a continuation lower back towards the 89.36 level and 88.32 thereafter. To the topside, bulls need to see a break of 91.74 to affect a reversal.

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