US dollar retreats after Friday rally

US dollar dips lower

The US dollar rolled back some of its Friday gains overnight in what looked like corrective price action after the monster Friday rally. The dollar index fell by 0.27% to 93.88 before recovering to 93.94 in Asia. With the transitory inflation story ringing increasingly hollow, the FOMC taper, and a potential recovery in US Non-Farm Payrolls on Friday, risks are now skewed to the topside for the US dollar. The dollar index could test 94.60 this week.

Having borne the brunt of US dollar strength on Friday, EUR/USD recovered somewhat overnight, rising 0.38% to 1.1605 where it remains in Asia.  Support is at 1.1520, failure of which signals more losses to 1.1400. Resistance is at 1.1700. Sterling fell slightly overnight to 1.3650. It is clear that the crowded BOE hiking trade is seeing more unwinding pre-announcement. If the Bank of England is not as hawkish as hoped on Thursday, sterling could well retest the 1.3400 region later in the week. It has initial resistance at 1.3700 and 1.3750.

USD/JPY is hovering around 114.00 after the LDP win over the weekend, with a fiscal stimulus package to follow, and the Bank of Japan minutes showing no signs of tightening monetary policy. It is likely to range ahead of the FOMC decision, having such a high beta to the US/Japan rate differential. USD/JPY has support at 113.40 while a rise through 114.70 signals more gains above 115.00. A hawkish FOMC opens a test of 116.00.

Rather surprisingly, AUD/USD is holding steady at around 0.7515, and it is clear the market is waiting for the RBA policy decision before pouncing one way or the other. If the RBA holds its dovish stance and QE outlook, we can expect short-term weakness in the AUD, although, with investor sentiment high globally, losses will be limited. A shift from an ultra-dovish stance from the RBA should see AUD book some quick gains and show notable strength against the yen and the New Zealand dollar. AUD/USD has resistance at 0.7550 initially and support at 0.7450.

Asian currencies are mostly unchanged today after another neutral USD/CNY fixing from the PBOC. With their high sensitivity to the direction of US interest rates, I expect the Asian currency space to be very quiet until the FOMC policy decision.

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