Dollar Snaps Back On Good Data, FOMC Next Week

The U.S. dollar performed extremely well in the first quarter of 2021 but so far, the second quarter has been more challenging. Since the beginning of the month, investors have been selling dollars. Despite the recovery the Federal Reserve said they are committed to keeping monetary policy easy and this stubbornness capped the rally in Treasury yields and the U.S. dollar. This outlook will be revisited in the coming week with the Federal Reserve’s monetary policy announcement and first quarter GDP report scheduled for release. Strong Markit PMIs, robust new home sales and a sharp rise in average prices shines a light on the strength of the U.S. recovery. In light of these reports, it will be difficult for the Fed to convince the market that rates won’t increase until 2023. The Bank of Canada has already brought forward their rate hike projections and the U.S. recovery is more robust and far along than Canada’s. Q1 GDP growth should be hot so even if the Fed leaves their guidance unchanged, investors could position for earlier tightening.

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The three greatest risks for the U.S. dollar this year are taxes, recoveries abroad and unexpected vaccine concerns. When the CDC and FDA suspended the use of the Johnson & Johnson vaccine, the greenback sold off across the board. Talk of higher taxes by President Biden accelerated the losses and eventually, the U.S. recovery will slow and recoveries abroad will gain momentum. For now however, there is a greater chance of gains than losses for the dollar this coming week with Q1 GDP and FOMC on the calendar.

Euro traded higher against the U.S. dollar on Friday on the back of strong PMIs. It has become very clear that despite rising virus cases and widespread lockdowns, the Eurozone recovery is gaining momentum. Although Germany’s manufacturing and service PMIs slipped slightly, the country’s composite index along with the indices for France and the region as a whole increased. The Eurozone composite rose to its highest level since July of last year. Germany’s IFO report is scheduled for release on Monday and these improvements in economic activity should be accompanied by stronger business confidence.

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