Wednesday July 21, 2021 - 13:52:09 GMT
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Forex View: Will the Dollar Trade Higher?
Global markets are currently in limbo as a resurgence of Covid concerns has added a fresh element of risk in what has been a battle between the race to vaccinate and a spreading delta variant. In the following, I cover the impact of this uncertainty on markets and what to look for in the dollar as well..
A battle is won but not the war
I was on vacation in the mountains in upper New York State recently. While vaccination rates are high in New York, this was still a tourist spot. While we took precautions, others did not. You would never know there were concerns over the delta variant as practically no one wore a mask, not in supermarkets, restaurants, bars, or hotels. It was like living in a pre-pandemic world. I was in a deli getting sandwiches before hiking and I asked the owner whether she had concerns about the delta variant. Her response was “I never heard of it.”
By contrast, when I returned home to New York City, I was struck by how many people were wearing masks. I don’t recall what it was like before I left for vacation but there certainly seemed to be a bit more caution in an area where vaccination rates are high.
My point is to contrast life in two different locations in a country that is divided between those vaccinated and those who choose not to get the vaccine. This suggests that the race to vaccinate and gain herd immunity to contain Covid-19 saw that side take the lead but this is a marathon, not a sprint.
In other words, while the first battle may have been won as life attempted to return to normal, the war is far from over as vaccination rates are still far from reaching herd immunity in many parts of the US and globally.
What does this mean for the economy?
Markets have been trading on the assumption that the post-pandemic economy would see a V-shaped recovery. The resurgence of Covid concerns, caused by the spread of the delta variant, has added a new element of risk to the equation. This is most evident in the bond market where US yields, for example, have plunged as the curve flattened. This has seen commodities pare back gains and stocks turn more cautious as the risk of fresh measures to contain the spread are being factored in. The dollar has benefited from safe-haven flows as well.
Fed Dodges a Bullet?
What poses a dilemma for forex traders is that expectations that a surging economy/rising inflation would force the Fed to scale back bond purchases/raise interest rates sooner rather than later. The Fed has resisted pressures to act by taking the view that inflation pressures would prove transitory.
While many, myself included, saw the Fed falling behind the curve, it may have just gotten lucky and appears to have dodged a bullet with rising Covid concerns giving it an excuse (emphasize the word excuse) to maintain its current policy stance and not rush to tighten policy.
What does this mean for markets?
What this means for markets is a focus on the pace of vaccinations, the spread of the delta variant, and perhaps most important any fresh measures that might slow the pace of economic growth, The offset is there will be no rush to slow or turn off the monetary spigot that continues to see massive amounts of liquidity sloshing around global markets.,
Whatever the case, economic data will be closely monitored and markets will react even though expectations will be more important, especially as the summer winds on and traders look ahead to post-summer trading where Covid concerns will likely intensify as colder weather is seen.
What about the dollar?
Currently, the dollar is benefiting as a safe haven. This suggests paying close attention to stocks/bonds as an indication of risk as that will impact the dollar. For forex traders keep an eye on the EURUSD as well. The reason to watch the EURUSD is that it is often seen as a barometer of US dollar strength/weakness in its role as the anti-dollar. In this regard, keep an eye on 1.18 as a sentiment indicator as it will dictate whether current EURUSD weakness leads to a run at the 2021 low at 1.1705. Whatever the case, this is a far cry from talk of 1.25, even 1.30 and shows the effects of the revival of Covid concerns.
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co-founder Global-View.com and creator of The Amazing Trader
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