The US currency ended June on a positive note. Last month, it rose by about 2.5% against its main competitors, including the euro.
June was the best month for the USD index since November 2016 due to the Federal Reserve's hawkish turn regarding the expected postponement of an interest rate hike.
The shocking news for the markets was the fact that now the overwhelming number of FOMC members (13 out of 18) believe that the first rate hike will occur in 2023 or earlier, and seven of them expect the first round of policy tightening in 2022. Before that, the US central bank claimed for several months that it would not tighten policy until 2024.
The greenback updated two-month highs on Wednesday, rising above 91.40 points, and the EUR/USD pair reached the lowest levels since the beginning of April in the area of 1.1845.
The US currency strengthened despite the decline in the yield of treasuries and the recovery of Wall Street indices.
The yield on 10-year US government bonds sank to the lowest level since June 21 below 1.45%, while US stock indexes mostly rose following the results of trading on Wednesday. At the same time, all three key indexes showed the best dynamics for the first six months since 2019.
Brooks Macdonald analysts believe that the stock market will continue to rise if stock managers remain confident in further weakening of inflation, which will keep bond yields at relatively low levels.
"Investors have three options: to lose money in the bond market after inflation, to lose it, leaving it in the form of cash, or to invest in risky assets," they noted.
In March, the yield on 10-year bonds reached 1.769%, but since then it has been gradually decreasing, actually playing out the base scenario of the US central bank, according to which the acceleration of inflation in the country is temporary, and the growth of national GDP in the long term will return to a level just below 2%.
"Judging by the nature of expectations from the Fed, the debt market is aware that the central bank may bring the start of QE reduction and raising rates closer, but believes that the final value of the key rate will be lower than expected. In addition, the market hopes that the emergence of an inflationary spiral is unlikely," the strategists of Saxo Bank said.
Long-term inflation expectations in the US are still below 2%, despite the jump in the consumer price index in annual terms in May to 5%.
If by the end of June, inflation retreats from multi-year highs, the yield of 10-year treasuries will continue to decline, which will not be the best news for the greenback.
So far, the US currency is not thinking of slowing down.
After the Fed's updated dot chart indicated the possibility of holding two rounds of key rate hikes by the end of 2023, the dollar began to grow and for the first time since the beginning of March, it recorded a three-day rally, adding almost 1.9%. Two weeks have passed since then, and the US currency has not lost its profits even in conditions of increased volatility. The dollar is still staying 1.7% above the level that preceded the announcement of the Fed's verdict on monetary policy at the end of the June meeting.
Risk appetite has decreased somewhat recently amid the spread of the new delta strain of COVID-19, which fuels the demand for safe haven assets, including the dollar.
Although there is still optimism that vaccination will cope with the new strain, however, a number of regions of the world, including European countries, need much faster progress in vaccination to contain the spread of the coronavirus. If the rate of vaccination does not accelerate, new quarantine measures may be required, which will slow down the pace of economic recovery.
The main topic on the markets remains the curtailment of monetary incentives from the Fed. Investors are interested in when it will start and whether the US central bank will be forced to act ahead of schedule.
Therefore, traders continue to monitor the statements of FOMC members, namely which side they take: follow their boss and support a slow approach in curtailing monetary stimulus,or are hawkish.
The head of the Federal Reserve Bank of Dallas, Robert Kaplan, said yesterday that he would like the Fed to start reducing its support for the economy before the end of the year, partly in order to make a sharp tightening of policy in the future less likely.
"The earlier the gradual reduction of the quantitative easing program begins, the more flexible the policy can be conducted," Kaplan said.
According to him, the balance of supply and demand in the US labor market is likely to remain, which will make explosive job growth unlikely. At the same time, the head of the Federal Reserve Bank of Dallas expects further improvement of the situation on the labor market.
The USD index reached a nearly three-month high on Thursday ahead of the release of the US employment report, which may give clues about when the Fed will start reducing stimulus.
"It seems that the scenario of an unexpected increase in the employment indicator, the publication of which is scheduled for Friday, which will push the US central bank to gradually curtail incentives and tighten monetary policy, is becoming more and more likely in the eyes of investors," said strategists at Cambridge Global Payments.
"An indicator significantly exceeding the mark of 700,000 new jobs can launch the locomotive of the dollar, and no one will want to stand in its way," they added.
The ADP report on jobs in the US private sector published on Wednesday exceeded analysts ' estimates, amounting to 692,000 people. Although investors are aware that the correlation between the agency's data and official data is small, a strong release from ADP fueled positive expectations.
Any sharp changes in the data regarding the forecasts may cause an increase in volatility in the markets, which believe that the Fed will take into account job growth when determining the timing of curtailing stimulus.
"It will probably take job growth close to the one million mark to shake up the US rate curve and the foreign exchange market again," ING experts said.
According to the latest report of the Conference Board, the share of respondents who believe that there are too many vacancies (54.4%), minus the share of respondents who believe that it is difficult to find a job (10.9%), reached the highest value since 2000.
The value and monthly dynamics of the indicator indirectly indicates that the demand for labor continued to grow at a decent pace in June. Paradoxically, this may have a negative impact on Friday's Nonfarm Payrolls, since simultaneously with the growing demand, there is a shortage of labor supply, which hinders job creation.
In addition, it is hardly worth waiting for strong data on the labor market, while unemployment benefits are in effect, allowing Americans not to work.
In the states that refuse the federal program of extended unemployment benefits, including direct weekly payments of $300, there is more active employment growth, which is not surprising.
The federal program will end on September 6, but half of the states will curtail it long before the general deadline expires. Four states rolled back payments on June 12, seven on June 19, and another 10 over the weekend; four states planned this step for July. Analysts believe that the main consequences of this policy will manifest themselves in July.
Economists again predict a relatively high figure for US employment, which may not meet expectations, which can turn into a disappointment for the markets and a sell-off of the dollar, which has strengthened considerably in recent days.
The upward movement of the USD index seems to have encountered strong resistance in the area of 92.50-92.55 (the area of three-month highs).
If the bullish momentum intensifies, the index may not face significant obstacles right up to year-to-date peaks near 93.30. Further up are the November 2020 highs around 94.30.
It is assumed that the greenback will remain positive while it is trading above the 200-day moving average, which is currently at 91.40.
On Thursday, the main currency pair sank to levels that it has not visited since April 6, but then it was able to recover somewhat.
The data on manufacturing activity in the eurozone published today exceeded forecasts, which provided some support for the single currency.
The purchasing managers' index in the manufacturing sector of the currency bloc, according to the final assessment, rose to 63.4 points in June from 63.1 points recorded in May. Experts expected the indicator to remain at the level of the previous month.
As for the technical picture, only a net breakdown of support in the area of 1.1845-1.1850 will clear the way for the bears to go down. Further, support is marked at 1.1830 and 1.1790. If the pair stays above 1.1845, this will limit its losses, and a break above 1.1900-1.1910 will weaken the downward pressure.
The material has been provided by InstaForex Company - www.instaforex.com