Overview: This week’s trading volatility has been rather low despite high-risk economic data such as inflation rates, unemployment rates, and retail sales numbers. The dollar basket has been contained in a tight range between 102.25 and 101.63, respectively.
Economic data this week included the RBA minutes, a rise in UK unemployment, falling inflation in Canada, the UK inflation rate remaining in two figures, a slight increase in Japan’s balance of trade, rising consumer confidence in the UK but remaining bleak, a lower inflation rate in Japan, and falling retail sales in the UK.
DXY
Starting with the dollar index, the DXY had been trading in a narrow range established on Monday, and since then, the DXY has had trouble continuing on its downward trend. While most of the stock market was down, the US 10-year yields were also limited in terms of volatility. Looking at the technical aspect, the DXY is still respecting the minor trendline from March and still holds an overall bearish outlook. While the DXY is still trading below both the 50-day moving average (DMA) and the 200 DMA, the 101 support level will be a key level to watch as a further break below the 101 level would put back the bearishness in the US dollar.
As we are heading towards what is believed to be a quiet period due to the upcoming FOMC meeting on May 3, we could expect further sideways movement coming into the next trading week. Regarding the FOMC meetings, markets are pricing in for the FED to give out a rate hike of 25 basis points, with the odds at 89% in the upcoming meeting.
EURO
The euro is also giving a similar scenario to the DXY, where the euro previously struggled to maintain above the 1.10 level and price made a short retracement back to a minor trendline from late March. The euro had been trading in a bullish channel and was still holding that bias due to market expectations of a further rate hike from the ECB as inflation remained high and showed little sign of easing. However, the euro has also been trading in a tight range established on Monday and may continue on its sideways path coming into the trading week as the market awaits the FOMC meeting. Currently, the euro is still trading above both the 50 DMA and the 200 DMA, respectively, which still support bullish market expectations for the euro.
A clean break of the 1.10 level and for price to remain above the level would re-affirm the bullish bias for the euro, while a break to the downside of the bullish channel would push the euro further back into the broader trading range since February.
POUND
Throughout the week, we have a high concentration of UK economic data being released, with the main headlines being the UK inflation rate that stays above 10%, which therefore underpins the idea that the BoE will have to raise interest rates more to combat the sticky inflation that they are facing at the moment. Such fundamental bias does put market expectations of a further increase in the pound sterling, especially with inflation in the US, to rest and believes in the end of the FED tightening cycle.
From a technical standpoint, the pound sterling had been struggling at the 1.2450 key resistance level since early April, and despite this week’s high concentration in UK economic data, it proved to be lacking the traction needed to spark the traction needed. Recently, the pound managed to form a double top after trading above the 1.2450 level, but the 1.2345 support level held the pound from trading even further downward. Currently, the pound is trading above the 50 and the 200 DMA, which shows bullish market expectations for the pound sterling. To reaffirm the bullish bias, a clean break of the 1.2450 level would be necessary. While a break below 1.2345 could lead to questions about the bullishness of the pound,
YEN
The dollar had also been in a trading range against the yen since Monday, while the yen managed to trade above 135 but was unable to hold above the level. However, the 134.95 support level still holds a bullish outlook for the dollar against the yen. While this week we only have Japan’s trade balance, which only shows a slight improvement but remains in deficit, it sparks little to no traction in the yen. Also, with Ueda’s first meeting next week, speculation is leading toward no change in BoJ policy at the moment. Looking at the technical aspect, the yen seems to be wanting to try to test the 135 level again, as with market expectations of rate hikes from the FED, while the BoJ is expected to make no change in the upcoming meeting. With such a fundamental bias, we could see the dollar rise against the yen if not in the upcoming trading week or after the FOMC meeting, and also if the bullish technical outlook holds, as we do have a trendline from January and previously the yen managed to break to the upside of the ascending triangle pattern. Currently, the yen is trading between the 50 and the 200 DMA, which gives a mixed market expectation for the yen.
CANADIAN DOLLAR
Once again, the Canadian dollar (CAD) has been the best-performing among the major pairs. The CAD managed to retrace some of its profits after testing the 1.3295 support level from November 2022. Price is currently testing the highs from early April, and that also aligns nicely with the 50 DMA near the 1.3550 level. The BoC previously held interest rates as it stated the end of its tightening policy, and now it seems the FED is also following with what is to be the last rate hike of the aggressive tightening policy from the FED in the upcoming FOMC meeting. Also, the latest inflation readings in Canada that show that inflation is cooling down do put expectations of a rate hold for the BoC. Both fundamentals from Canada and the US do favor the US, as the FED is still going to make one more rate hike in the upcoming meeting. A break to the upside of the 1.3550 resistance level could confirm the bullishness of the US dollar against the CAD and open the door for a further rally. Also, the fact that price is currently trading above both the 50 and the 200 DMA puts market expectations to the upside in the currency pair.
AUSTRALIAN DOLLAR
Last, we take a look at the Australian dollar (AUD). The AUD still remains in a choppy market environment. A peek at the RBA minutes shows that members were determined to do what was necessary to bring inflation back down within target. The RBA minutes revealed that the central bank only paused its interest rate hikes this month to allow time to gather more information. While we don’t have inflation readings or any other economic data in Australia this week, it does put more emphasis on a wait-and-see scenario for the AUD. This does explain the choppy market environment in the AUD, where the Australian dollar is mired in narrow trading ranges of roughly 0.6680 to 0.6770. Also, currently the moving average readings are quite mixed, as both the 50 and the 200 DMA are starting to converge with one another.
