USD Strengthened On Positive Recovery Signals

Friday’s solid non-farm payrolls report has buoyed USD into a new week of trading. The US Dollar Index opened Monday with an advance towards a 3-day high, continuing its month-long consolidation above ascending trendlines.

Despite job numbers falling slightly short of forecasted values, analysts generally agreed that the NFP report was a positive sign for post-pandemic recovery. As a result, investors are preparing to face more aggressive fiscal tightening from the Federal Reserve. In particular, the possibility of more than one 50 basis-point hike seems increasingly likely as the Fed seeks to reduce the size of its balance sheet.

Meanwhile, the immediate focus for the week will be on the release of FOMC meeting minutes on Wednesday. The Fed will weigh tapering plans against ongoing geopolitical tensions in Europe, with escalating food and energy prices potentially encouraging a more hawkish outlook.

Further rate hikes may well sustain the greenback’s bullish action and enhance its position against emerging market currencies in the current economic climate. Against USD optimism, equity markets have been muted since the central bank pared back its asset holdings.

US crude oil inventories will also draw attention on Wednesday in light of international supply concerns. Elsewhere, forex traders will eye opportunities around Tuesday’s interest rate decision from the Reserve Bank of Australia. Finally, Thursday sees the publication of European Central Bank meeting notes.