Dollar extends rally

The US dollar continued where it left off on Friday when it surged higher after the US jobs report came out much stronger than expected, catching many people by surprise. While the additional gains have been limited so far, the dollar’s recovery is likely to be the main focal point in the first few days of the week given the lack of any significant news.

Why is the dollar finding support?

Well, because of strong data. That surprise 500-thousand-plus job gains we saw on Friday means the market may gravitate towards “higher for longer” narrative which may help provide support for the dollar on the dips, while keeping a lid on precious metals and potentially stock markets too. Investors are realising that the Fed may, after all, have to maintain a contractionary monetary policy in place longer than expected in order to dampen inflationary pressures that could arise from a tighter labour market. This is why we have seen the probability of another 25-basis point rate hike in March rise to almost 100%, while that of another 25 bp hike in May has jumped to 67% from about 40% a week ago.

GBP/USD heading to 1.20?

The greenback is also benefitting from a dovish-leaning Bank of England, which has caused the GBP/USD to turn negative on the year. The cable looks like it wants to test the 1.20 handle as it was just 30 pips away from there at the time of writing.

USD/JPY turns positive on the year

Meanwhile, the USD/JPY has turned positive on the year. The yen fell overnight on reports that Bank of Japan’s Masayoshi Amamiya, seen as leaning on the dovish side, was approached by the government to become the next BoJ governor. The report has raised speculation that there won’t be any massive changes in the BoJ’s ultra-loose monetary policy.

EUR/USD bulls have not bought Lagarde’s hawkish remarks

The only currency that has the potential to outshine the dollar is the euro, after Christine Lagarde came across as being quit hawkish last week – although the market has not bought it yet. "This is the highest in all the time that core inflation has been in our part of the world. So, I get it, headline inflation has gone down ... but underlying inflation pressure is there, alive and kicking, which is why we are committing as we intend in this monetary policy statement, and this is why I say we have more ground to cover, and we are not done." So far however, we haven’t seen any signs of a recovery in the EUR/USD, after the exchange rate failed to hold above 1.10 handle last week, before plunging to below 1.0760ish. There was some mixed data out of the Eurozone this morning. German factory orders rose 3.2% m/m vs. 2.1% expected, while Sentix Investor Confidence on the Eurozone improved to -8.0 from -17.5 previously (vs. -12 expected). But Eurozone retail sales fell by 2.7% m/m, which was worse than expected.

Dollar bottoming pattern

Additionally, the dollar is likely to find support on technical buying after several major currency pairs formed topping patterns last week. Momentum-chasing traders are thus likely to be looking for opportunities to fade any short-term dips on the dollar.

The dollar index itself printed THIS beautiful hammer candle on the week chart, although a higher high is still needed for confirmation that the dollar has indeed bottomed.

Overall, there are more supporting factors for the dollar than against it. But the dollar buying does look a little bit overstretched on smaller time frames. A big of a pullback may be needed to encourage more bulls to join the rally.

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