• USD Rebounds as Stocks Wobble
• AUD Soars on Higher Inflation Expectations
• CAD Unchanged as Oil Snaps 8 Day Rally
• GBP Retreats Ahead of Q4 GDP
• Happy Lunar New Year!

At the beginning of the year, the U.S. dollar hit a bottom and it hasn’t revisited those levels since January. However, sentiment is shifting with the dollar pulling back this week. Much of that has to do with the persistent strength of U.S. equities but as stocks consolidate and the gains moderate, investors are wondering if the bubble is beginning to deflate. This is important for currency traders because a large part of the dollar’s decline in 2020 was tied to the strength of equities. If stocks are at the cusp of a deeper correction, the dollar would be prime for a rally.

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In the short term, there are many reasons why stocks could correct. As shown by today’s weaker jobless claims report and last week’s subdued payroll growth, the future is bright but current conditions are weak. Equities had a great run and a new speculative fervor has increased volatility. Last week it was GameStop, this week Reddit forums are all over cannabis stocks. They gained 51% in one day and lost almost the same amount in another. This level of hysteria can be very dangerous in an overextended market.

The new South African variant has been reported in California. There are now four states with cases of this highly contagious variant that appears to be resistant to current vaccines. If it spreads quickly, it could spark a new fear that would send equities sharply lower and the U.S. dollar higher in the process. With that said, the University of Michigan consumer sentiment index is due for release tomorrow and the current vaccine rollout along with the continued rise in stocks should boost confidence.

Meanwhile, it is no surprise that commodity currencies continued to outperform European currencies. Virus cases are low, there are minimal restrictions and the summer weather is beautiful. The Australian dollar added another 0.4% to its gains thanks to stronger consumer inflation expectations. Inflation is rising across the globe but they are still at rates low enough for the central bank to be unconcerned. The New Zealand dollar shrugged off weaker credit card sales. Manufacturing data is due for release this afternoon and the ongoing recovery should lift activity. Oil prices dropped for the first time in 9 trading days and this decline prevented the loonie from participating in the rally.

Euro extended its gains while sterling pulled back ahead of fourth-quarter GDP. Although the resilience of the euro is remarkable considering their slow vaccine rollout and strict lockdowns, the currency could reject the 50-day SMA at 1.2150 if Eurozone industrial production is weak. The UK’s fourth-quarter GDP report is scheduled for release on Friday. Economists are looking for a slight increase but with the government issuing very tough holiday restrictions, we think they would be lucky to eke out positive growth.