Behind this strength of the North American currency is the continuous rise of U.S Bond yields. Yesterday, the 10-year bond hit a new high of 1.77%. And although yields fell slightly, the trend continues, pointing towards levels close to or above 2% in the case of the 10-year bond.
The yield differential between American bonds and those of the rest, especially European ones, is widening day by day. This is providing a solid push for the U.S. Dollar against all counterpart currencies.
Today, the ECB President Christine Lagarde made statements indicating that they will continue to maintain low-interest rates. This seems a clear warning to the markets that they will not let European bond yields be affected by the uptrend of U.S. bonds.
Data from the North American economy support these movements with apparent signs of a rapid recovery that is significantly ahead of the European economy's evolution. The vaccination rate in the United States, well above the European rate, also contributes significantly to this economy's better performance.
Today the ADP Nonfarm Employment Change data is published with an expected figure of 550k. If this confirms, it could positively encourage the markets. In turn, it could signal a rise in interest rates and a strengthening of the U.S. Dollar.
Moreover, this figure is usually seen as an indicator of Friday's figure, the Non-Farm Payrolls Report, which could significantly influence the markets.
In this bullish scenario for the North American currency, the dollar index has already managed to overcome the Fibonacci retracement levels of the last bearish leg that began in September 2020, as we can see in the daily chart. It is now heading towards the reference levels between 94.22 and 94.70, above which the downtrend that began in early 2020 would be over.
A strong Dollar due to long-term interest rate rises could negatively affect the stock markets with a possible increase in risk aversion. In this hypothetical scenario, a vulnerable currency would be the Australian dollar.
The technical formation of the AUD/USD pair is interesting. A head-shoulder whose neckline has been exceeded is currently making a pullback, potentially targeting the 0.7270 zone.
Sources: Investing.com, Bloomberg.