The US Dollar continued to strengthen yesterday against most of its competitors except for the yen, which draws support from the stock markets’ weakness.
The main driver for this movement seems to be attributed to the upward rebound in US bond yields. Although they slowed down their momentum yesterday, bond yields are still at three months highs. The Dollar’s surge might seem odd if we look at the latest NFP number, which fell below the average forecast.
However, the falling unemployment rate, which dropped to 5.2%, provides additional support for the US Dollar.
The Federal Reserve – optimistic about job creation.
John C. Williams, the president of the Federal Reserve Bank of New York, remarked that more important than the one-month data for unemployment is the surge in jobs creation occurring in recent months, bringing the unemployment rate to levels ever closer to those before the crisis. He was also optimistic about job creation for the near future.
Although Mr Williams highlighted that the beginning of tapering is not related in any way to the interest rate hike, he did not rule out an early announcement regarding the withdrawal of monetary stimulus. This view contrasts with the more hawkish Fed officials such as Dallas Fed’s Robert Kaplan, who was less optimistic about the economy's evolution.
Today, there will be another round of statements from Fed members that are expected to keep markets hooked.
But perhaps more important than that is the ECB meeting.
Although the markets don't expect any significant decision on monetary policy from the European Central Bank, investors might look for any hint or even announcement of a possible start of the Pandemic Emergency Purchase Programme (PEPP) reduction. This program, designed to counter the pandemic’s effects, has a validity period. A potential reduction might not have a major impact on the fixed-income market since the main program for purchasing fixed-income assets would be maintained.
But in our current market scenario, with central banks undecided on the tapering direction, should the ECB opt to change the PEPP volume, this could be seen as a "hawkish" action, potentially provided a much-welcome boost for the euro. The opposite could set the EU’s currency tumbling out even further.
The EUR/USD pair continued declining yesterday, reaching the 1.1800 support level before slightly recovering in a classic take profit movement awaiting the ECB meeting.
Sources: Bloomberg, reuters.com.
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