Overview: The significant drops in US equities and the rise in US interest rates yesterday drove the dollar generally higher in North America. As the dollar basket is strengthening relative to its peers and the yield on US 10-year bonds is rising as the FED indicates further rate hikes in the future, and markets are becoming a “risk-off environment.” for investors.
This week, economic calendars have been quite busy as many strong indicators were released, such as the GBP PMIs that surprised the market with strong numbers, the CAD CPI that shows a declining inflation, the RBNZ 0.5 interest rate hike, the FOMC minutes that signal more rate hikes to come, the falling EUR inflation, the contracting US GDP, the soaring Japan inflation, and the upcoming US core PCE price index.
DXY
The dollar had been on the rise as the FED hinted on more rate hikes to come, and on the previous FED minute to highlight how the FED members was actually leaning towards a 50 bps hike but eventually turn into 25 bps hike instead and looks for further confirmation on inflation to be in a sustainable downtrend to the 2% target and FED tightening seem to be extending to Q3.
With the Fed remaining hawkish, the DXY managed to break above the bull channel with a weak breakout but some follow through, and appears to be testing the January high at around the 105.35 resistance level. However, a break below the previous support level of 103.75 could shift sentiment back to bearish for the dollar basket. The stochastic shows how the dollar basket is currently overstretched and strong bullish pressure. The 200-day moving average is currently pointing at 106.46, just above the January high, and may come into play in the coming weeks.
EURO
The euro has been contained in a tight bear channel since early February and broke below its previous support level of 1.07 before the last upswing. Currently, the support level of 1.0500 would be an interesting price level to target as the bearishness in the euro continues. The 200-day moving average is at 1.0329, and the stochastics show momentum to be quite stretched and hovering in overbought territory, implying that the euro is under strong bearish pressure.
POUND
Looking at the pound sterling, the price is still contained within the broader trading range between 1.2450 and 1.1850, the key level. Previously, the market was shocked by the U.K. service and manufacturing PMI, which drove the pound to rise to 1.2147, but then the gain was erased in the next few trading sessions. Currently the pound is leaning toward the lower part of the trading range and hovering just above the 200-day moving average at 1.1928 and the 1.1850 key support level. The stochastic does not show momentum to be overstretched, also forming a mini double top and a mini divergence, and seems to have room to go lower. So the 1.1850 support level would be a nice target to keep an eye on in the upcoming week.
YEN
Much pressure is being applied to the Japanese economy as a result of extremely high inflation, but the bond yield was previously left unchanged at the BoJ meeting. Japan’s 10-year bond yields have also been hovering around the 0.5% mark since early February. Investors are also assessing Ueda’s nomination as the next BoJ governor, but it seems the BoJ is likely to maintain its ultra-easy policy stance. The moving average is pointing at 137.05, and the stochastics show price to be stretched to the upside, which can imply strong bullish pressure on the USD/JPY.
The yen previously bottomed at the 128 level, as it was near the May 2022 126 swing low. The yen would then have been in a bullish trend since February. The price is currently clinging to the previous high set in December 2022 at 134.50, having broken above the key level before falling back as Japan’s inflation hits a new high of 4.3%. If the USD/JPY remains bullish, the 200-day moving average or the 138 resistance level could be a good target.
AUSTRALIAN DOLLAR
After the strong bull trend since October 2022, the AUD/USD has given back a portion of its gain as it topped at 0.7157 and has been trading lower ever since, making a two-legged bearish swing to the 200-day moving average at the 0.6799 support level. This bearishness in the AUD comes as unemployment rose to 3.7% while it was expected to hold at 3.5%. Aside from the hawkish stance and raising interest rates, the fall in the stock market really drives a strong risk-off sentiment in the markets, which affects risk-on currencies like the AUD.
As mentioned previously, price is currently hugging the 200-day moving average, and the bias is to the downside. The stochastic is showing how price is currently stretched and also implying strong bearish pressure. A strong and convincing break of the 200-day moving average could open the door for the price to trade even lower to 0.6650, which was the December 2022 support level, and a break above 0.6880 could bring sentiment back to bullishness to test February highs.
CANADIAN DOLLAR
The CAD had been trading in a large triangle pattern ever since December 2022, and the price is behaving in a sideways manner with little directional bias. Previously, price bottomed near the 200-day moving average in mid-February, with the moving average aligned with the key support level at 1.3250, and now price is testing the trendline of the triangle pattern after the strong bullish move from the USD, which was also backed up as CAD inflation numbers slowed more than expected and fell to 5.9%, the lowest of the year, reinforcing the expectation of BoC policy tightening to pause while the FED continues with their tightening policy, which creates a bullish bias.
A breakout of the triangle pattern could push prices higher, with a potential target of 1.37, the December 2022 high and key resistance level. The 200-day moving average is currently pointing at 1.3260. While the stochastic shows the price to be stretched and also implies strong bullish pressure, If price instead gives a pullback, 1.3450 can be a good support level for bulls to watch in order to create the higher low for the USD’s bullish bias.
