The U.S. Dollar is gaining strength this week,
with the U.S. Dollar Index (DXY) rising by 0.7% to 103.08, marking the highest
level so far this year. The EURUSD has lost 0.6%, trading at 1.08800,
representing the most significant gains for the Dollar since January 5.
The strengthening of the Greenback is
supported by positive macroeconomic data in the United States. The latest labor
market report for December 2023 showed strong indicators, and inflation is on
the rise. The U.S. 10-year Treasuries yields increased to 4.00-4.10% from 3.80%
on this news, contributing to the Dollar's 1.5% gain. However, the potential
for a further rally is limited as investors are focused on achieving a new
stock market record above 4819 points for the S&P 500 broad market index.
Higher borrowing costs could significantly impact the ability to set this
record.
The Greenback responded to rising yields, and
attempts by European officials to support the Euro had limited success.
Bundesbank President Joachim Nagel and Austria’s Central Bank Governor Robert
Holzman, both European Central Bank (ECB) Governing Council members, stated
that it is too early to discuss interest rate cuts. Despite these efforts, the
Euro disregarded this verbal support, while the Dollar gained ground on Tuesday,
increasing by 0.6% against the single currency. Bets on interest rate cuts by
the Federal Reserve (Fed) in March dropped to 66.3% from 76.9%, according to
the CME FedWatch Tool. Investors are finding it challenging to ignore the
potential inflation threat in the U.S.
The WisdomTree Bloomberg U.S. Dollar Bullish
Fund (USDU) experienced capital inflows last week, highlighting a contradiction
between investors' desire to set a new stock market record and secure their
funds against rising inflation in Treasuries.
From a technical perspective, the EURUSD may
experience another 0.3-0.4% downside to 1.08600-1.08800, but it is likely to be
limited by this strong support level. The U.S. retail sales data and inflation
report in the Eurozone on Wednesday are unlikely to provide further strength to
the Dollar. ECB President Christine Lagarde, who will be speaking at the World
Economic Forum this week, may not provide enough upside momentum for the
Dollar. Stronger catalysts are needed for the Greenback to break through the
support at 1.08600-1.08800.
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