US Open Note – Dollar extends losses; pound near 3-year high

Raffi Boyadjian, XM Investment Research Desk

Dollar eases as reflation trade returns

The dollar is tumbling over the last couple of sessions as the reflation trade strengthened. President Joe Biden will probably push his aid proposal forward without Republican support. Some comments from government suggest that the stimulus negotiations act as a cautionary tale. The Republican Congress did the same thing to push through President Trump’s tax cuts back in 2017. The relief package is likely to be closer to $2 trillion rather than $1 trillion.

The dollar index is registering the third straight day of losses holding around 90.50 and finding support at the 50-day simple moving average (SMA). Dollar/yen is losing considerable ground (-0.53%), returning to around 104.50 after failing to surpass the 200-day SMA at 105.55. This week’s price action suggests its recovery won’t be a straight line. Futures suggest that US stocks will edge slightly lower from the all-time highs when Wall Street opens.

Bearing in mind that most Fed officials are positive about the recovery and not worried about inflation, most of the comments in the coming days will not pose a threat to current rallies. As new virus cases continue to slow optimism will grow, encouraging further gains in risk-sensitive currencies.

Euro and pound gain ground

In a speech yesterday, ECB President Lagarde mentioned that the recent rise in coronavirus cases, the additional strains of the virus and the restrictions with lockdowns are a significant downside risk to euro area economic activity. Also, she said that monetary and fiscal policy continue to work hand in hand. The next meeting of the European Central Bank (ECB) will take place on March 11, when new macro forecasts will be announced. However, these will probably be marked down as the region has failed with the vaccine rollout so far.

The euro is advancing near the $1.21 psychological level against dollar, while pound/dollar is skyrocketing to a fresh almost three-year high around $1.38.