The US dollar (USD) has started the week on solid ground. It appears that the recent trends of recovery for the greenback are set to continue. USD has tailwinds of a strong COVID vaccination program, encouraging economic recovery signs and the prospect of more fiscal support. This dominant USD narrative comes as the euro (EUR) struggles amid renewed lockdowns. We see continued corrective pressure is likely for EUR/USD.
- USD is the dominant force of major forex right now and remains in a sweet spot of recovery.
- A strong Non-farm Payroll report on Friday could exacerbate this move.
- The corrective winds continue to blow for EUR.
USD bulls remain in the driving seat
The roll-out of COVID vaccinations in the United States is progressing well. With an average of 2.7m vaccines per day, the Biden administration is ahead of its target of 150m vaccines in the first 100 days of office. Around a third of the adult population in the US has received at least one jab. In the EU where there have been issues of supply and political mishandling leading to questions of trust in the vaccines, the percentage take-up has struggled to get to double figures.
Additionally, the US economy is ready to go gangbusters into Q2, with lockdowns easing and fiscal stimulus cheques burning a hole in consumers’ pockets.
The Federal Reserve is not ready to tighten monetary policy yet. However, there are murmurings amongst FOMC members of timing for tapering asset purchases and potentially higher rates. This is all helping to fuel appetite to buy USD. Subsequently, futures traders are steadily unwinding their net US dollar short positioning that had been built up throughout 2020.
As we can see in the table, positioning in futures markets for major forex is still net short US dollar. However, the direction of travel is key and this is a position that has been increasingly unwinding in recent weeks. Traders have been busy closing out their short USD contracts. This bodes well for the continued USD bounce.
Although the positive USD moves came on all currencies apart from EUR, we can see in the chart below that the market is still very much in the mode of closing out net-long EUR futures positions relative to USD futures contracts. This is helping to drive the USD recovery and pull EUR/USD lower.
Non-farm Payrolls could play further into this
Friday’s Non-farm Payrolls data is expected to be a strong number. After last month came in well ahead of expectation, the consensus is expecting another month of strong jobs growth (around 650,000). If this comes to the topside of this it would help to fuel a stronger USD move once more.
A relative weakening of EUR to continue
Much of Europe is struggling with the 3rd wave of COVID and lockdowns are being re-inforced. It means that the tide of downside on EUR/USD is likely to continue this week.
Last week’s low of 1.1760 is likely to be tested and broken. We continue to expect EUR/USD to fall back towards 1.1600/1.1700 and a strong Non-farm Payrolls report on Friday could be the trigger. Even if there were to be any near term bounce, we would be looking for another lower high around 1.1835/1.1880 before renewed weakness.
