Currencies Fall as Stocks Lose Ground.
The Dow Jones Industrial Average and the NASDAQ both reached new highs at the start of New York trading, but then gave up their gains to finish the day lower. As traders lost faith in the risk-on rally, currencies fell as well, but reversed before stocks.
With no big economic reports that caused today's reversal. Investors were upbeat ahead of the non-farm payrolls report on Friday. It was a big disappointment, but instead of selling, investors opted to buy, hoping that the poor employment report meant no tapering.
Today, reality set in, and they realized that without a taper, inflation could rapidly grow. Indeed, the New York Fed's survey of inflation expectations rose to its highest level since September 2013, indicating that this was the case.
The increase indicates that they anticipate a significant price increase in the coming months. As inflation expectations rose, the dollar rose against the euro, the Japanese yen, the Swiss franc, the Australian and New Zealand dollars . Despite the fact that non-farm payrolls were disappointing.
This week's CPI and retail sales reports might exceed expectations.
Spending, in particular, is projected to grow just 0.2%, citing the resumption of economic activity, the sharp increase in wages, and higher gas prices, although some analysts believe the forecast being low.
Expectations for a better report this week could help the US dollar avoid more losses.
Since the Bank of England and the Bank of Canada are expected to reduce monetary stimulus faster than the Federal Reserve, there was still more demand for sterling and the Canadian dollar. Currency moves were heavily influenced by changes in monetary policy expectations on Friday, and although the US dollar regained some ground, analysts don't expect the fundamental catalyst to be forgotten.
The Euro might be strong bull, as pandemic controls are starting to loosen. The curfew and travel ban in Italy were lifted two weeks ago, but the curfew and travel ban in Spain were lifted this weekend. France intends to loosen restaurant restrictions next week, and Germany may not be far behind.
As the recovery gains momentum, demand for euros will return. The ZEW survey from Germany is due out tomorrow, and we expect morale to rise as stocks reach new highs and vaccination rates rise across Europe. Any EUR/USD pullback should be limited to 1.2050.
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