The US dollar index is under pressure ahead of key parliamentary testimony by Jerome Powell. The index is also falling as Congressional Democrats continue to deliberate on the new $1.9 trillion stimulus package.
The US has been the worst-affected country by the coronavirus pandemic. The country has lost more than 500,000 people, and the trend will continue.
At the same time, the US has been the most aggressive country in its pandemic response. Congress has already passed a $4 trillion stimulus package. The latest was a $900 billion package that was passed early this year.
Congress is now debating another record stimulus package that was proposed by Joe Biden. The package has a headline figure of $1.9 trillion. These funds will go towards various programs like vaccine distribution, $1,400 stimulus checks, and states funding.
The Federal Reserve has also provided stimulus indirectly and directly. It has lowered interest rates to record lows and implemented the biggest quantitative easing program on record. It is buying government bonds worth more than $120 billion per month. As seen below, this has pushed the total balance sheet to more than $7 trillion.
Fed balance sheet
Therefore, the combination of the low interest rates, large quantitative easing, and spending by Congress has led many investors to worry about rising inflation. The recent economic data from the United States showed that the headline consumer price index (CPI) rose to 1.5% in January. Therefore, there is a high probability that the rate will reach 2% later this year.
Indeed, the treasuries market is sending signals that investors are expecting higher inflation. The chart below shows the recent performance of the 5-year, 10-year, and 30-year treasury yields.
5-year, 10-year, and 30-year treasuries
US GDP data ahead
The US dollar index is also reacting to the relatively strong economic numbers released by Markit on Friday last week. The data revealed that the US manufacturing and services PMIs increased to 58.5 and 58.9, respectively. The composite PMI that includes readings from the manufacturers and service providers increased to 58.8, the highest level in more than 6 years.
This week, the main economic number to watch will be the second reading of the fourth quarter GDP that will come out on Friday. Economists polled by Reuters expect the data to show that the US GDP increased by 4.2% in the fourth quarter. While this is an important number, it will probably not have a major impact on the dollar. That’s because investors already know how the economy performed based on the first estimate.
Other important numbers that will affect the dollar index this week will be the January goods orders and new and pending home sales. Last week, data showed that the housing market dropped by 6% in January while the building permits increased by 10.4%. Further, existing home sales rose by 0.6% to 6.69 million in January.
Other important numbers this week will be consumer confidence and the initial jobless claims.
Dollar index technical outlook
The hourly chart shows that the dollar index has been in a downtrend after it reached a high of $91.05. The index has moved below the 25-day exponential moving averages while the Average Directional Index (ADX) has continued to drop. It is also slightly above the important support at $90.12. Therefore, it seems like bears have prevailed, meaning that it could continue falling as the target moves below $90. However, a climb above $90.50 will invalidate this trend.