US Dollar, Stocks Attract More Buyers

It has been a great week to be long U.S. dollars. The greenback traded higher against all of the major currencies and these gains drove the Dollar Index to its strongest level in 4 months. For the technicians out there, this was also the first time since May that DXY closed above the 200-day simple moving average which is typically a signal for further gains. Mixed U.S. data did not deter investors from driving U.S. assets higher.

Personal spending dropped -1% against a forecast for a -0.7% decline. Personal incomes fell -7.1% against the -7.3% forecast and the University of Michigan consumer sentiment index was revised up to 84.9 from 83.6. Some of these reports were less than ideal but the ongoing recovery in the U.S. economy is irrefutable.

U.S. dollar banknote with map

Image Source: Unsplash

Consumer confidence, ISM, and Non-Farm payrolls are scheduled for release tomorrow and all of these reports are expected to be stronger. On Thursday, we saw jobless claims fall to its lowest level since the pandemic and while that may not show up until the revisions, there’s no doubt that the US labor market is recovering. We look forward to further gains in the dollar with USD/JPY aiming for 1.10 and EUR/USD headed for 1.17.

On Friday in particular, there was a broad-based risk rally. Aside from the rise in stocks, Germany’s IFO report beat expectations, which helped to stem the slide in EUR/USD. Despite the uptick in COVID cases business confidence improved. While the German economy is expected to contract in the first quarter and most likely the first half of the year, successful vaccination programs abroad give German businesses hope. Still, the risk is to the downside for EUR/USD with tighter restrictions and the prospect of stronger NFPs ahead. The Sterling continues to outperform the euro. UK retail sales rose 2.1% in the month of February after contracting -8.2% at the start of the year. Excluding autos, retail sales rose 2.4%.

The Australian, New Zealand, and Canadian dollars also traded higher on the back of equity market gains. There are no major economic reports scheduled for release from New Zealand next week. Canada has its January GDP report and Australia has PMI, trade, and retail sales data. Oil prices rose sharply on Friday as authorities try to resolve the blockage at the Suez canal, a passageway for 12% of all global trade.

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