US dollar in peak inflation hopes

US dollar retreats

Rallies by the euro and sterling pushed the US dollar lower overnight as markets in New York continued to price in peak inflation expectations and assume that all the Fed tightening was now priced into US markets. The dollar index fell sharply by 0.46% to 99.85 after touching my initial target of 100.50 earlier in the day. The selloff has continued in Asia with euro and sterling leading the way, with the yen also rallying after some official noise from Tokyo around exchange movements. The dollar index has fallen by 0.24% to 99.60.

The dollar index is now approaching support around 99.45, and there appears to be some pre-holiday long covering in the market as investors reduce long US dollar exposure and book profits. Several tightening moves by central banks this week, as well as hawkish risk around the ECB, are also prompting a rebalancing. Failure of 99.45 could see losses extend to 97.70 next week, but the US dollar remains in an uptrend if longer-term support at 96.50 holds.

EUR/USD jumped 0.60% overnight to 1.0890, adding another 0.23% to 1.0915 in Asian trading. A widening lead in the election polls by France’s President Macron lifted euro sentiment, and investors bought back shorts ahead of the ECB policy meeting today. Given the hawkish moves by central banks over the last week, that is a sensible strategy ahead of the Easter holiday, despite Ukraine risks. A hawkish tilt by the ECB could set off a large, short squeeze that could extend to the 1.1200 to 1.1300 region where the longer-term resistance line comes in. On the downside, the 1.0800 region is crucial longer-term support. The support line extends back to 2017 and then, if your charts are long enough, all the way back to 1985. A time when I was putting my Air Force application in and had pastel coloured tee-shirts and a flat-top haircut. A daily and weekly close below 1.0800 will be a major bearish signal for EUR/USD.

Sterling jumped by 0.90% to 1.3117 overnight as UK inflation climbed to 30-year highs. That saw tightening by the Bank of England quickly priced into the UK yield curve, starting with 0.25% next month. GBP/USD has climbed another 0.20% in Asia to 1.3140 as shorts are unwound ahead of Easter. A hawkish ECB today should allow sterling to coattail the expected euro rally and could extend gains to 1.3250.

With US yields edging lower overnight, USD/JPY remained steady once again at 125.40 before easing to 125.30 in Asia.  USD/JPY is just below its multi-year highs at 125.80 and despite some more official noise from Tokyo today, it still looks likely to test higher next week. The cross remains entirely at the mercy of the US/Japan rate differential, and if US yields fall once again tonight, a short-term below 125.00 is entirely possible.  Any drop to 124.00 and 123.50 should find plenty of keen dip buyers. Only a very sharp fall by US yields changes the bullish outlook.

Asian currencies held steady overnight once again, with lower US yields and a weaker US dollar versus the majors being offset by higher oil prices and ongoing China concerns. Asian currencies booked only minor gains overnight and remain steady in Asia today. The only mover of note has been USD/SGD, which has fallen by 0.75% to 1.3520 after the MAS tightened monetary policy via the S$NEER today and maintained a hawkish outlook.  USD/CNY and USD/CNH are almost unchanged overnight as any US dollar weakness is offset by Euro strength in the CFETs basket and the expectation of an imminent RRR rate cut. Both USD/CNY and USD/CNH are approaching one-year trendline resistance levels at 6.3770 and 6.3950 respectively. Daily closes above would signal another leg of yuan weakness and limit gains versus the greenback by other Asian currencies.

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.