Are Dollar Bulls Back In Control?

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

It was a great week to be long and to gauge the durability of the dollar’s rally and it is important to understand that there was not 1 but 4 main catalysts for the U.S. dollar’s recovery this past week: 1) sharp rise and recoupling with Treasury yields, 2) softer global data, 3) decent /optimistic , 4) lack of fresh geopolitical risks. Investors were relieved that after striking specific targets in Syria, Trump did not escalate tensions further and instead abandoned plans for more sanctions. But it’s too soon to be optimistic about a change in behavior as Trump turned his attack to OPEC on Friday, calling artificially high and saying it “will not be accepted.”

If President Trump stays relatively quiet, U.S. data beats and edge closer to 3%, the can extend its gains. The most important piece of data on the U.S. calendar will be first-quarter on Friday. Before that, the calendar is dominated by and a report. Since GDP is not due until the end of the week, Treasury yields should have a greater impact on USD flows. If 10-year rates break 3%, stocks could crash, leading to a broad-based FX sell-off. Consumer confidence, which is due on Tuesday is likely to hurt more than help the greenback because sentiment will probably be dented by recent headline risks. There’s also a Bank of Japan , but no changes area expected as the Japanese are in no rush to exit from their ultra-easy monetary policy.

is trading lower ahead of next week’s European Central Bank’s . After consolidating for 8 trading days and failing to break above 1.24 throughout that time, EUR/USD finally broke down on cautious comments from ECB member . The head of Germany’s Bundesbank said there were recent indications that the first quarter in Germany was “not so brilliant.” However on Friday, ECB President said growth momentum is expected to continue and that its confidence in the inflation outlook increased even though the euro-area growth cycle may have peaked. Euro will be the main focus in the week, with a central-bank rate meeting, Eurozone PMIs, the report and German scheduled for release. Since the last monetary policy meeting, we’ve seen more deterioration than improvement in the Eurozone’s economy. Therefore we don’t expect Mario Draghi’s outlook to improve materially this month as German sentiment and spending deteriorates. The ECB is not ready to signal the end of QE and they are not thinking about raising interest rates anytime soon. If the PMI and IFO reports, which will be released before the rate decision miss expectations, investors will position for renewed dovishness from the central bank. The risk is to the downside for euro and dovish comments from Draghi could drive EUR/USD to 1.21

peaked this week on the back of disappointing data and dovish comments from Bank of England Governor Carney. , and all fell short of expectations, prompting the central bank governor to say that while there area some differences in monetary policy views, he’d take them into consideration while being conscious “that there are other meetings over the course of the year.” In other words, he’s basically telling us that they have plenty of time to raise interest rates and they don’t need to do it in May. In response, next month’s rate-hike expectations dropped from 96% on Monday to 50% by Friday. As the trend of softer data began earlier this month, the pullback in expectations and sterling are not a surprise. Even if the BoE ends up being optimistic, the next meeting is 3 weeks away so further profit taking is likely. For this reason, we expect further losses in GBP/USD with a possible slide down to 1.3850. The only piece of meaningful U.K. data on the calendar is , which is scheduled for release at the end of next week.

All 3 of the commodity currencies extended their losses on Friday. The latest Canadian economic reports took above 1.27. While grew 0.4%, stagnated in February causing the 3-month average to drop to its lowest level since 2015. also eased to 0.3% from 0.6%. These reports reinforce the Bank of Canada’s cautiousness and shows how the economy slowed from the prior month. No economic reports were released from Australia and New Zealand but the strength of the took and close to their monthly lows. For AUD/USD, the key level to watch is .7650 – If that breaks, the next stop could be .75 cents. The pair could hit this level if falls short of expectations next week. CPI is expected to accelerate but with consumer inflation expectations declining, the risk is to the downside. NZD is also vulnerable if the falls short, which is possible given the decline in in March and weaker manufacturing activity.