Currency markets struggle for direction
After a week away, not a lot has changed in the currency space. Overall, the US dollar looks slightly weaker as inflationary fears refuse to show up beyond all reasonable doubt in the data prints. That has led to a period of noisy but ultimately range-trading markets. The dollar index unwound most of Thursday’s gains on Friday, falling 0.40% to 90.13, where it remains in Asia. The index remains in a broad 89.50 to 90.50 range, with a breakout indicating the US dollar’s next directional move.
Similarly, the EUR/USD and GBP/USD retraced losses after the Friday US data. EUR/USD is unchanged at 1.2165 while GBP/USD has eased 20 points to 1.4140 in Asia. Ultimately, EUR/USD is bouncing around in a wider 1.2100 to 1.2150 range this past fortnight, while GBP/USD has clear support and resistance at 1.4100 and 1.4250. In the bigger picture, only failure of 1.2000 and 1.4000 respectively undermine the longer-term bullish outlook for both.
USD/JPY showed once again its sensitivity to rate differentials, falling 0.70% to 109.50 on Friday as US long-dated yields tumbled after the Non-Farm Payrolls. Almost unchanged at 109.55 today, failure of 109.30 signals a deeper retracement to 108.50, although a rise in US yields will see the cross move back above 110.00 once again. The US inflation data on Thursday looms as an important directional driver.
Asian currencies are locked in neutral after the PBOC succeeded in putting a floor under yuan appreciation last week. USD/CNY at 6.4000 today, hardly changed from a week ago. Until the PBOC signals comfort at more yuan appreciation, the broader Asian grouping will likely mark time around these levels.
Investors will be keeping a close eye on the Federal Reserve, which holds a policy meeting next week. The Fed is likely to remain dovish and argue that with over 7 million fewer Americans in jobs than before the pandemic, no change, or even talk of change in monetary policy is required. This message could put a damper on the US dollar.
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