The US Dollar plunged rapidly last week, losing over 3.5% and pulling back to levels below 104.0, nearly erasing gains since Trump’s election victory.
The US dollar has been actively declining since early February and intensified the decline at the start of this month. An attempt to climb above the 50-day average at the end of February was met with intensified selling, and this week, the price has already pulled back below the 200-day average.
A popular explanation is that the dollar is suffering because of Trump’s tariffs. It is correct to call the dollar’s decline a reassessment of expectations for the US Fed key rate.
The odds of two or more key rate cuts before the end of the year exceed 90% vs. 48% two weeks earlier.
A big EU defence spending plan and a dramatic shift in budget planning approaches in Germany lead to lower expectations for a key rate cut.
This news has caused the single currency to rally against most of its peers, most notably in the pairing with the dollar, where we have seen a 4.5% rally since the start of the week.
Higher-than-expected inflation in Japan is also setting the stage for a key rate hike, perhaps as early as March 19th. In other words, the gap in monetary policy is closing rapidly on both sides.
Indices
US indices declined in unison with the dollar, although they usually go in the opposite direction. But not everything is terrible.
The S&P500 and Nasdaq 100 indices were getting support on declines towards the 200-day moving average. That’s a long-term trend signal line for many of the big players. A failure below it could mean a regime change for stocks from ‘buying dips’ to ‘selling highs.’
The S&P500 has already broken a year-and-a-half upward trend and settled dangerously at levels just above 5700, testing buyers’ resolve almost daily. A failure of this support would activate an accelerated downside scenario into the 5200-5300 area.
For the Nasdaq100, which is now near 20000, a sustained move lower may not have meaningful headwinds until 18000. The beginning of recovery from this area will allow us to talk about the start of a new impulse with the potential to renew historical highs, as the accumulated oversold is whetting investors’ appetite.
It is a completely different story in Europe, where the German DAX40 continued to rewrite historical highs at its peak, showing an 18% increase since the beginning of the year. The new government’s plans to spend money on stimulus, setting aside self-imposed constraints in the form of budget deficits and debt-to-GDP ratios, sparked a sell-off in bonds. But this sell-off is in anticipation of a larger supply of government debt, not because of fears about Germany’s solvency. We are seeing a flow of money into euros and equities, not a flight from the region like during the Greek crisis.
The FxPro Analyst Team