Last month was strong on upbeat US economic data and hawkish Fedspeak, with some officials putting 50bp rate hikes back on the table at their meeting in a few weeks’ time.

Money markets have strongly repriced the Fed rate hike cycle with the peak rate up towards 5.50% seen in the summer.

The 10-year US Treasury yield, a widely followed proxy for global borrowing costs, has hit levels not seen since November and is a whisker away from the key psychological 4% level.

Dollar bulls have responded handsomely with the DXY rising some 2.8% in February and stopping four consecutive months of declines.

The cycle bottom at 100.82 a few weeks ago fell below the midpoint of the 2021 rally at 101.99 but the failure to close below there on a weekly basis has seen buyers defend this area and bounce back.

The impressive four-week rally has currently stalled at the next long-term Fib level (38.2%) around 105. Consolidation just off the highs is normal price action considering the bullish run seen in Feb.

The near-term top is at 105.32 with the 100-day simple moving average at 105.73. If we lose this week’s low at 104.36, then 104 and 103.82, a long-term spike high, comes into view.

At the moment, US monetary policy is highly data dependent, and we have key job and inflation releases still to come ahead of the next FOMC meeting on 22 March.

If this incoming data starts to paint a different picture, then we could see some unwinding of these recent hawkish bets on the Fed hitting 5.50% in the Fed funds rate.

That said, we note that seasonals over the next few months are seen to be relatively positive for the greenback.

The underlying, fairly grim geopolitical situation might also help underpin support for the world’s premier reserve currency.
 

GBP outperforming

Sterling is up over 1% this week and near the top of the G10 FX charts.

The Brexit deal announced a few days ago has given the pound a psychological lift, as the new “Windsor Framework” makes life easier for businesses trading with Northern Ireland. But this new agreement isn’t likely to boost investment in the UK, nor does it improve trade terms between the wider UK and EU.

Undoubtedly, there is now less uncertainty, and the improved political relations reduce some hard Brexit risk premium in GBP.

But probably more important long-term drivers are global risk sentiment and central bank action.

Yesterday saw cable push up to its 50-day simple moving average at 1.214 before paring those gains and closing weakly at 1.202.

That peak needs to be beaten with the major closing above there to view 1.22 and beyond. Strong support is at the recent tests of the 200-day simple moving average (SMA).

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