Forex overview. US Dollar Under Pressure as Market Shifts Focus to the Fed – ForexNews.PRO
Foreign exchange markets exhibit a slightly more stable demeanor, yet implied volatility remains high. Market participants are keen to analyze the eurozone’s February Balance of Payments data and await the Bank of Canada’s interest rate announcement. Later in the day, Federal Reserve Chair Powell will deliver a speech, coinciding with the release of February data concerning China’s holdings of US Treasury bonds. Overall, anticipate a weaker US Dollar.
While FX volatility has receded marginally, it hasn’t collapsed. Similarly, the dollar has struggled to recoup its recent losses, even with stabilizing equity markets. Last week’s market reaction to trade shocks seemed appropriate across most asset classes, except for Treasuries. It appears that highly leveraged long positions are being unwound as hedge funds adjusted their Supplementary Leverage Ratio strategies.
If this interpretation holds true, rather than a significant foreign divestment from US Treasuries, US yields could stabilize at slightly lower levels, mitigating the need for a substantial dollar rally. Regarding foreign sales of US Treasuries, tonight’s data release will reveal China’s February holdings. A significant shift in China’s $760 billion holdings seems unlikely, but a decrease could reignite Treasury and dollar selling.
March US retail sales data might show a boost as consumers anticipated tariff implementation. However, the market’s primary focus will be on the Federal Reserve’s assessment of current economic conditions, particularly in light of Chair Powell’s upcoming speech. It is expected that a dovish stance from Powell tonight could weigh on the dollar.
The Bank of Canada is set to announce its policy. A hold seems more probable than a cut, particularly after 225bp of easing. However, the surprising downside CPI data for March may shift the balance. Short-term rate differentials play second fiddle to idiosyncratic USD risks and tariffs in USD/CAD. Consequently, the pair is undervalued, trading below 1.40.
The Eurozone Balance of Payments data may bolster the narrative of a shift from US equities to the eurozone. Although the data won’t pinpoint the specific outflows from US equities, it should shed light on inflows into eurozone equity markets. If the data confirms this trend, investor confidence in the EUR/USD rally could strengthen.
