End Of Month Flows Send Dollar Higher

Month end flows drove the U.S. dollar higher against all of the major currencies on Friday. The month of April was a challenging one for the greenback. The Dollar Index dropped from 93.30 to 90.50 with virtually no meaningful relief rallies. Despite steady improvements in U.S. data, every week was a losing one. This decline was driven by the Federal Reserve’s insistence that more improvements are needed in inflation and employment before balance sheet changes can be considered. However as the month drew to a close, investors returned to the greenback because good data cannot be ignored. Personal income, spending and manufacturing activity in the Chicago region were stronger than expected with the University of Michigan also reporting a larger upward revision in their consumer sentiment index. Improvements like these are expected to continue in the week ahead reminding investors of the U.S. economy’s outperformance.

The contrast between the U.S. recovery and the Eurozone’s was reinforced by today’s first quarter EZ GDP report. Although GDP growth contracted less than expected in Q1 (-0.6% vs. -0.8% forecast), the pandemic drove the Eurozone into a double dip recession. EUR/USD sold off sharply but the contraction was shallow and brief. The second quarter is already off to a good start with Germany upgrading their GDP forecasts. Germany set a new record with 1 million vaccinations in one day and by June, France will be allowing anyone over 18 to get a vaccine. As the number of shots in arms increase, the euro area’s recovery will gain traction quickly and when that happens, the euro will regain its luster.

Until then, we look forward to another week of strong U.S. data. Faster growth is expected in the service and manufacturing sectors leading to a non-farm payrolls report that could exceed a million jobs. The U.S. dollar rallied on Friday and we expect further demand in the week ahead as traders position for a good number.

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