USD dollar perks up, EUR/USD, AUD/USD take a turn for the worse Jan 17th 2024

A key voting member of the FOMC pushed back on imminent Fed rate cuts on Tuesday, sending bond yields and the US dollar higher - to the detriment of EUR/USD and AUD/USD.

By :Matt Simpson, Market Analyst

A key voting member of the FOMC pushed back on imminent Fed rate cuts on Tuesday, sending bond yields and the US dollar higher. The 7-year yield rose 7.6 bps, nearly twice its 1-year daily positive average of 3.9 bps. The 5-yeaar up to the 20-year all rose over 10 bps on the day.

“…the central bank should not rush to cut its benchmark interest rate until it is clear lower inflation will be sustained” FOMC voting member Governor Christopher Waller said on Tuesday

While conceding that it is ultimately up to the Federal Reserve board to decide the course of rates, Waller thinks cuts should not begin until the Fed are “relatively convinced” inflation was “sustainably” near its 2% goal. Given core CPI is still nearly twice the Fed’s target and CPI rose to 3.4% y/y, a rate cut in March seems highly unlikely in my view.

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Still, Fed fund futures still imply a cut in March with a 64.2% probability, although this is down from 76.9% the day prior. This now places a 34.1% probability of a hold in March, up from 19% the day prior. Market pricing now sees just four cuts in 2024, down from five the day prior. But unless the wheels fall of the economy, two to three may be more realistic in my view. And that leaves further upside potential for the US dollar.

Market Outlook Central Banks

US dollar technical analysis and market positioning (weekly chart):

Traders remain net-short USD futures against all tradable currencies according to the IMM. Whilst exposure may not be at a sentiment extreme by historical standard, sentiment is changing and likely forcing bears to cover their short USD positions and send the dollar higher. And as it retains the highest interest rate against all FX majors barring the New Zealand dollar, it suggests outperformance for the dollar against those currencies.

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EUR/USD technical analysis (weekly chart):

It’s interest to see that EUR/USD stalled just below its 200-week MA in December and formed a weekly shooting star candle. Prices are now back beneath the 200-week EMA – and both averages have provided bearish moves in excess of -4% since May. EUR/UD is just -4.5% lower from its December high, and as market pricing remains too dovish in my view then I retain a bearish bias on the EUR/USD weekly chart and for a break beneath 1.08.

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EUR/USD technical analysis (daily chart):

We saw a clear breakout from a bear flag on the EUR/USD daily chart, in line with yesterday’s bias. The bear flag measures an approximate target near the December low, although 1.08 makes a viable interim target (which also resides near the 1-week implied volatility lower band). From here, the bias remains bearish beneath 1.095. Bears could consider fading into minor moves on lower timeframes, or seek bearish breaks of consolidation or continuation patterns.

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AUD/USD technical analysis (4-hour chart):

The Australian dollar saw an extended move lower on Tuesday, and it is not uncommon to see prices retrace against such a move in the Asian session (especially if stability has been seen at the beginning of the session). RSI 2 and 14 reached oversold levels but are now curling higher as prices try to lift themselves from their lows. Given the heavy volumes during the last hours of NY trade near the cycle lows, bears may be caught short if prices retrace higher. Therefore, bears may want to wait for a retracement before rejoining the bearish trend on the four-hour chart.

The bias is to look for signs of weakness around 66c, or below the 38.2% Fibonacci ration around 0.6635 in anticipation of a move to 0.6550 and 0.6500.

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– Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

Market Outlook AUD/USD

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