US dollar gets support from retail sales

The US dollar remains firm

The US dollar remained firm once again on Friday, as US Retail Sales kept the inflation story alive, in currency markets at least. The disconnect between US bond yields and the US dollar continued blissfully forward. The US dollar may also now be receiving an element of haven-buying support as concerns over the delta variant virus ratcheted higher.

The dollar index rose 0.16% to 92.72 on Friday, where it remains in Asia today. EUR/USD and GBP/USD continue to trade on the weak side. EUR/USD is at 1.1805 today, not far from support at 1.1700. A dovish potentially ECB on Thursday is capping the single currency, and risks are still weighted towards a fall below 1.1700 before the ECB meeting. A much deeper correction could occur if the ECB goes with a fixed 2.0% inflation target as this would imply more easing to throw on the BOJ-like 15 years of easing so far.

GBP/USD is looking very vulnerable this morning, having fallen 0.50% to 1.3755 on Friday, where it remains today. Rocketing delta-variant cases, just as the UK prepares to reopen today fully, have spooked markets. GBP/USD has support at 1.3740 and then the 200-day moving average (DMA) at 1.3695. The charts suggest a substantial fall to 1.3400 is possible if PM Johnson has moved too quickly. What could go wrong?

AUD/USD sits at 7-month lows today at 0.7390, increasing virus restrictions in New South Wales and Victoria spook markets locally. The Australian dollar’s role as a risk barometer for Asia, in general, is also not helping sentiment today. The AUD/USD can potentially extend losses to near 0.7200, but bears may find short AUD/NZD positions better to play AUD weakness. AUD/NZD staged a massive head and shoulders breakout below 1.0650 on Friday.

USD/Asia has risen by around 0.25% today ex yuan and yen. That is unsurprisingly given the weakening of risk sentiment over the weekend on virus and growth fears. I expect USD/Asia to remain bid this week. Still, the deteriorating confidence is more likely to be reflected here by softening local equities and AUD and NZD weakness as proxies.

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