The US dollar is making another attempt at growth. Against the backdrop of an almost empty economic calendar, Greenback is guided by the rhetoric of the Fed's members, geopolitics and the dynamics of the Treasury. The yield of 10-year US government bonds jumped to 2.928% yesterday, for the first time since February this year. In turn, the yield of two-year treasury securities exceeded the nine-year maximum. The yield spread of the 2 and 10-year Treasuries narrowed to 41 basis points, for the first time in 10 years. The dollar reacted instantly and went up in practically all pairs, especially the pound, the Canadian and New Zealanders.
These dynamics were due to several reasons. Let's start with the most global factors. Against the background of a temporary calm around Syria, active preparation for nuclear disarmament of North Korea is underway. On April 27, the leaders of the DPRK and South Korea should meet, and then a historic event, the meeting of Donald Trump and Kim Jong-un should take place. According to the American press, the White House now determines the location. The meeting can take place in one of the 9 cities in the world, Prague, Warsaw, Helsinki, Stockholm, Oslo and Geneva, Bangkok, Ulaanbaatar or Singapore.
In addition, recently there was information about the secret visit of Mike Pompeo (director of the CIA, claiming the post of Secretary of State) to North Korea. The summit was fruitful. A few days later, the South Korean leader stated that the northern neighbor was ready for complete nuclear disarmament without any preconditions or requirements. Given the fact that Pyongyang has waved a "nuclear checker" for many years, the current events are unprecedented, especially against the backdrop of a calm in the Middle East. The third world war, which was talked about on the eve of American strikes, did not take place and this fact shows the temporary de-escalation of the conflict in this region. The Syrian problem will remind itself of more than once, but in the context of the currency market the moment "here and now" is important. In other words, the geopolitical situation increased demand for the dollar, despite an array of unresolved problems. For example, with respect to US-China trade relations.
The support for the US currency was also provided by macroeconomic factors. Against the backdrop of the almost empty economic calendar, the market focused on secondary indicators that came out better than expected. First, the index of business activity in production, which is calculated by the Federal Reserve Bank of Philadelphia, suddenly jumped, reaching 23.2 points (March figure - 22.3 points). It should be noted that the growth of this indicator surprised the market, as experts expected its decrease to 20 points. This suggests that US businesses have not lost optimism about the prospects for production activity, despite the unpredictable Trump policy in the field of foreign trade.
Another reason to strengthen the greenback is the good data on the labor market. The weekly indicator of the number of applications for unemployment benefits continued its downward movement. After an unexpected jump in late March to 242,000, the indicator gradually declined and reached 232,000 yesterday. And although this indicator is of indirect importance for the market (compared to Non-farms and the ADP report), the dollar benefited from this factor.
Representatives of the Federal Reserve also contributed to the recovery of the US currency. William Dudley, John Williams, Eric Rosengren, Randal Quarles, Loretta Mester and even Lael Brainard (who usually takes a soft position), all of them noted the growth of key economic indicators and expressed confidence in achieving the target inflation rate this year. This optimism leaves a chance for a fourfold increase in the rate this year, although the most likely scenario is still a basic scenario (three increases). In any case, the Fed is not in a hurry to panic over the weak inflation rate and the level of salaries. Published this week, "Beige Book" Fed confirmed an optimistic mood. The labor market in the federal districts is still growing (there is even a shortage of highly skilled specialists in construction and transportation), as well as the level of wages (though not so fast).
Thus, the US currency takes advantage of the moment and tries to restore its positions throughout the market. But the growth arguments do not look reliable. The macroeconomic statistics of the last days are of secondary importance, and the fact of a triple rate increase is already taken into account in prices. Geopolitics is also not a reliable tool. The trade war between the US and China did not end in a truce, and at any moment this conflict can remind us of itself.
All this suggests that the current strengthening of the US currency may again be an illusion of a trend change. To fully restore the dollar, the US needs to at least reach a compromise with China, and the Federal Reserve to accelerate the rate of rate hikes. While this has not happened, any strengthening of the greenback should be seen as an excuse to open profitable trading positions.
Speaking directly about the euro-dollar pair, here the "stock of the southern course" is quite wide. The first support level is located at 1.2230 (the bottom line of the Bollinger Bands indicator, which coincides with the lower boundary of the Kumo cloud on the daily chart). If the southern impulse gains strength, then the second (more powerful) support level is located at 1.2205 (the middle line of the Bollinger Bands indicator on the weekly chart). To overcome these levels, the dollar needs strong fundamental arguments, which at the moment there.
