All of the major currencies traded higher on Monday as investors continued to drive the U.S. dollar lower. When a rise in Treasury yields, sell-off in U.S. stocks, strong payrolls and retail sales reports can’t lift the dollar, some wonder if it is time to worry. For the past few months, investors have been pricing in a U.S. recovery and, with more than half of the U.S. adult population receiving at least one COVID-19 vaccine shot, strong growth in the second quarter is almost certain. However, investors have also been piling into the reflation trade since the beginning of the year, and that trade is growing tired. According to the CFTC, U.S. dollar net shorts are at their lowest level since June 2018. The greatest risk for the U.S. dollar is faster vaccine rollouts and recoveries in other countries, which is only a matter of time.
The U.S. dollar drove currency movements on Monday, but three other currencies are in focus this week – the euro, sterling and the Canadian dollar. EUR/USD broke above 1.20 for the first time since early March. The European Central Bank meets on Thursday, right before April PMIs are released. Germany’s Bundesbank confirmed that economic output decreased in the first quarter and it's highly unlikely that France and Spain will escape contractions. The PMIs should be subdued, which will keep the central bank cautious. However, every day more shots are going into arms across Europe and with time, the recovery will accelerate. The next ECB meeting is on June 10, and a lot could happen in seven weeks. The best course of action for the central bank is to keep policy unchanged and offer cautious optimism. The current situation is grim but growth should accelerate in the third quarter. With that said, 1.2050, the 100-day SMA is a very important resistance level for EUR/USD.
The Canadian dollar hit a one-month high against the U.S. dollar before giving up its gains to end the day lower. The Bank of Canada, which meets on Wednesday, is in a similar boat as the ECB. COVID-19 cases are surging with much of the country in strict lockdown. Unlike the Eurozone, however, data hasn’t been terrible. Job growth is strong, the housing market is robust and manufacturing activity accelerating. Although tighter restrictions could weigh on demand, for now, incoming data bolsters rather than weakens the BoC’s confidence. Add to that the positive implications of a U.S. recovery and Canadian policy-makers have more reasons than the Europeans to be optimistic.
There is no monetary policy announcement for the UK this week, but jobless claims, inflation, retail sales and PMI numbers will keep sterling in focus. After a successful vaccine rollout, the UK economy is widely expected to gain momentum. The lockdown has ended, with pubs and restaurants reopening. Over the past few weeks, restrictions have eased significantly and these steps will provide a big boost to the recovery. Sterling should outperform other currencies this week as we are looking for stronger numbers all around.