The US dollar declined this week, fueled by higher inflation and depressed volatility, and this trend is likely to continue
The trading week is ending today, and the themes of the week were a lower US dollar and higher US equities. Extremely low volatility levels helped equities because the stock market remains bid whenever volatility drops.
US Treasury yields fell significantly despite better than expected economic data, which was odd. During an economic recovery, yields climb back from the lows as investors dump the safety of bonds for riskier assets. Yet, this week, both bonds and stocks rose. If this is more than a temporary divergence, it will have a much bigger impact on the market’s volatility in the short-to-medium term.
The Coinbase IPO was the main event of the trading week. The crypto exchange started trading at a valuation of about $100 billion, which signals that cryptocurrencies are here to stay.
One story with a mention from the FinTwit community this week relates to a particular company listed on the US stock market that reached a $100 million valuation. What is wrong with this picture? The company owns only one deli (i.e., a small restaurant) in New Jersey. Yet, investors sent its price higher for the simple reason that they do not know what they are buying. It tells us much about the state of the current market, where the abundance of money dictates everything.
In Europe, the UK’s FTSE 100 reached the magical 7,000 level. Despite Brexit, investors are looking for new opportunities and the promise of a faster reopening of the UK economy.
Lower long-term yields in the United States have sent the gold price higher. Investors know that yields and gold move in an inverse relationship: when yields rise, gold falls, and vice versa.
Dollar weakness is also reflected in the WTI crude oil price, which rose to above $63.50 and shows no signs of backing off.
US data made headlines this week. Inflation and retail sales both beat expectations by a mile, fueled by the huge fiscal and monetary stimulus underway in America. In fact, the dollar decline gained pace on Tuesday after the inflation data was released, because higher prices put pressure on the currency as investors sell the dollar in search of a much stable alternative.
With no important economic data ahead, the remainder of the trading week will likely be the same: lower US dollar, higher stocks, and depressed volatility.
Markets to Watch
The FTSE 100, AUD/USD, and EUR/GBP markets are in focus today.
The bid behind the UK stock market continues. A triangular pattern broke higher recently, with the measured move pointing to more strength to beyond pre-pandemic levels.
The FTSE 100 has lagged behind other indices that moved above pre-pandemic levels months ago, but we should remember that Brexit was a major drag on the UK stock market. With that out of the way, it may regain the lost ground sooner than many market participants expect.
The AUD/USD pair reached a high above 0.80 and then corrected at the end of February along with the Nasdaq-100 index. But as the Nasdaq recovered to a new high, the AUD/USD failed to follow. A head-and-shoulders pattern could be on the cards, with resistance lying above and the neckline lying below.
The EUR/GBP traded with a bearish note since last December’s Brexit announcement. The vaccination fiasco in continental Europe didn’t help, pushing it even lower.
However, this pair recently pushed above the main bearish trendline in a move reflecting both the euro’s strength and the pound’s weakness. If it goes above the previous lower high resistance, EUR/GBP has more upside potential, as suggested by a pennant formation building just below that resistance.
Winners and Losers
The winners of the week are US stocks and the FTSE 100. This week’s loser is the US dollar.