Transitory Fed weakens US dollar
With Jerome Powell firmly camped still in the transitory inflation corner, US bond yields unwound their previous day’s rise, and that saw the US dollar give back part of its previous session’s gains. The dollar index fell 0.44% to 92.37 overnight, leaving it mid-range between support at 92.00 and resistance at 92.85, which it once again tested and failed at intra-session overnight. Currency markets continue to show more caution on the inflation equation than either stocks or bonds, and this has been the case for the past couple of weeks. In the meantime, a break of the aforementioned support/resistance levels is now required to signal the US dollar’s next directional move.
A dovish Powell lifted EUR/USD off its 1.1770 lows overnight, rallying to 1.1850, where it remains in moribund trade in Asia. With inflation data remaining soggy in Europe, the single currency needs to recapture the 1.1900 regions to signal a greater recovery. Otherwise, a break of 1.1770 could still signal a deeper correction to between 1.1500/1.1600. A Bank of England official suggested that UK rate hikes could be getting closer overnight, which saw sterling climb 0.35% to 1.3860. That rally has faded in Asia, with GBP/USD falling to 1.3840. GBP/USD has clear support at 1.3800 and resistance at 1.3900.
AUD/USD has fallen 0.30% to 0.7460 in Asia, despite very impressive employment data. Covid-19 worries are clearly perceived as a more immediate threat to AUD/USD today, and resistance at 0.7500 looks safe for now. Large options expiries at that level today, though, mean that AUD/USD is unlikely to track much lower intra-session. AUD/NZD selling may also be weighing on the Australian dollar after a hawkish RBNZ pushed the NZD/USD higher yesterday. NZD/USD has held gains above 0.7000 overnight, and if inflation data released tomorrow morning is higher than expected, the tightening noise will increase. That should see the kiwi continue to rally versus the US and Australian dollars.
Asian currencies have recorded modest gains overnight in a collective sigh of relief after Jerome Powell kept the Fed in the dovish corner. USD/INR has fallen to 74.476 and USD/KRW to 1141.10, helped along by firm India inflation data and a slightly hawkish Bank of Korea. However, the retracements are shallow, and in the case of USD/IDR, USD/THB and USD/MYR, they are almost non-existent. The latter three remain the most vulnerable to further weakness along with the Philippines as all four continue to grapple with challenging Covid-19 situations. The fall in oil prices overnight will have done the IDR and MYR no favours, and you can throw in political uncertainty into the ringgit as well. With USD/CNY content to range between 6.4500 and 6.5000, it is regional Asia that remains the most vulnerable to further losses for now.