The performed extremely well in the first quarter of 2021, but the second quarter, so far, has been more challenging. Since the beginning of the month, investors have been selling U.S. dollars. Despite the recovery, the Federal Reserve said it is committed to keeping monetary policy easy, and this stubbornness capped the rally in and the U.S. dollar. This outlook will be revisited in the coming week, with the Federal Reserve’s monetary policy announcement and first quarter GDP report scheduled for release. Strong Markit PMIs, robust and a sharp rise in average prices shines a light on the strength of the U.S. recovery. In light of these reports, it will be difficult for the Fed to convince the market that rates won’t increase until 2023. The Bank of Canada has already brought forward its rate hike projections, and the U.S. recovery is more robust and far along compared with Canada’s. Q1 GDP growth should be hot, so even if the Fed leaves its guidance unchanged, investors could position for earlier tightening.
The three greatest risks for the U.S. dollar this year are taxes, recoveries abroad and unexpected vaccine concerns. When the CDC and FDA suspended the use of the Johnson & Johnson (NYSE:) vaccine, the greenback sold off across the board. Talk of higher taxes by U.S. President Joe Biden accelerated the losses and, eventually the U.S. recovery will slow and recoveries abroad will gain momentum. For now, however, there is a greater chance of gains than losses for the U.S. dollar this coming week with Q1 GDP and FOMC on the calendar.
The traded higher against the U.S. dollar on Friday on the back of strong PMIs. It has become very clear that despite rising virus cases and widespread lockdowns, the Eurozone recovery is gaining momentum. Although Germany’s manufacturing and service PMIs slipped slightly, the country’s composite index along with the indices for France and the region as a whole increased. The Eurozone composite rose to its highest level since July of last year. Germany’s IFO report is scheduled for release on Monday and these improvements in economic activity should be accompanied by stronger business confidence.
Sterling failed to rally despite strong retail sales and PMIs. UK consumer spending rose 5.4% in the month of March, more than three times stronger than forecast. Excluding fuel costs, spending grew 4.9%. Manufacturing, services and the composite PMIs climbed above 60 in April, the first time in more than a year for all three indices. These reports should be overwhelmingly positive for , but sterling could barely muster a rally.
The Australian economy is also gaining momentum, with faster manufacturing and service sector activity. With that said, Australia’s Perth region entered a three-day lockdown after a second COVID-19 case. The New Zealand and Canadian dollars ended the day unchanged. has seen very little follow through after this week’s hawkish Bank of Canada announcement. Part of this had to do with positioning, as there are high levels of USD/CAD short positions. Canadian retail sales and monthly GDP numbers are due for release next week.