One of the most popular investment strategies of this year - bet against the US currency - is currently undergoing a serious test. Traders are in a hurry to buy back the greenback after its unexpected two-month rally. At the same time, short positions for USD for about $25 billion remain open.
Some analysts still consider the weakening of the US currency a matter of time.
"Eventually, yields in the US should stop rising, and financial flows are likely to turn against the dollar. Thus, the fall in the USD rate is only a matter of time, which is likely to happen in the period from the middle to the end of the second quarter," said Nomura strategists.
"In addition, the Fed may stop recent trends if yields in the United States continue to rise. This can only reinforce our view of the dollar weakening in the second quarter, " they added.
In the meantime, the growth of US government bond yields continues to support the greenback. On the eve of the indicator for ten-year treasuries rose to 1.637%.
USD is strengthening for the second consecutive session and has already approached a strong resistance level around 91.90 points.
The bulls will aim for 92.50, where the 2021 highs are located.
The dollar's steady firm stance in recent weeks has cast doubt on the previous constructive view of the euro.
The EU economic recovery continues to be overshadowed by the projected better performance of the US economy. In addition, the slow pace of vaccination against COVID-19 in the bloc stands in stark contrast to the likelihood that the entire adult population of the United States will be vaccinated by July.
In the second half of last week, the EUR/USD pair attracted sellers near the psychological mark of 1.2000, which caused its bearish correction.
This was primarily due to the fact that the ECB showed uncharacteristic speed, announcing an increase in the pace of asset repurchases in order to contain rising yields in the EU. According to European Central Bank President Christine Lagarde, the ECB does not want the growth of yields to lead to a premature tightening of financial conditions in the region.
If the Federal Reserve agrees to increase purchases of long-term bonds as part of QE next Wednesday, the strengthening of the US currency against the background of rising treasury yields will probably not go beyond the first half of the year or even earlier.
Market participants would now like to see a similar reaction from the Fed, which will hold its next meeting this week.
However, the main catch is that the US central bank, unlike its European counterpart, believes that the growth in US government bond yields is a healthy sign of economic recovery.
Most likely, the Fed will continue to follow the current course, and its leadership will continue to talk about the lack of prospects for a surge in inflation and the central bank's focus on full employment.
It is expected that following the March meeting, the Fed will keep the interest rate unchanged (at the level of 0-0. 25%) and update its own economic forecasts. High expectations will once again highlight the gap between the pace of recovery in the US and European economies.
Sellers are still controlling sentiment around the euro, which started the week in negative territory and is slowly approaching the key support near $1.1900.
The EUR/USD pair may continue to pull back with the target at 1.1830-1.1835. This is the area where the 2021 lows and the 200-day moving average converge are. Its clean break will open the way for bears to the next support at 1.1760.
However, if the bulls are active, then they will aim for last week's highs in the 1.1990 area and further to the psychologically important level of 1.2000.
