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Forex Friday: DXY, GOLD, USD/CAD and Yields

Welcome to another edition of Forex Friday, a weekly report in which we discuss selected currency themes mainly from a macro viewpoint, but we also throw in a pinch of technical analysis here and there.

In this week’s edition, we discuss the dollar, gold and look forward to the key events coming up in the week ahead.

  • Dollar remains supported on data strength
  • How high will yields go?
  • Will gold succumb to pressure again?
  • USD/CAD eyes breakout ahead of BOC
  • Key macro events in the week ahead

Dollar remains supported on data strength

It has been a choppy session for FX traders as the dollar has been stuck inside a tight range. At the time of writing, it was still a touch lower on the day and the week, following 4 weeks of gains. Is that run about to end or will the dollar bulls save the day in the last few hours of today’s session?

A lot of the attention was on the ISM Services PMI. As it turned out, this came in more or less in line with the on the headline front at 55.1 but there were a few surprises in the detail of the report, which helped to keep the dollar’s downside limited. Specifically, the employment sub-index jumped 4 points to 54.0, while new orders index surged to 62.6 from 60.4, both beating expectations.

Earlier this week, the ISM manufacturing PMI’s prices index jumped nearly 7 points to 51.3. We also saw jobless claims falling unexpectedly to 190K versus a rise to 196K expected. On top of this, Unit Labour Costs were revised higher to 3.2% for the fourth quarter from 1.1%, confirming that wage inflation is on the rise. In the previous week, the Fed’s favourite measure of inflation – the Core PCE Price Index – also beat forecasts.

How high will yields go?

So, today’s services PMI data is in line with the recent strong showing from other sectors of the U.S. economy and underscores the need for the Fed to keep going with rate hikes.

As a result, yields on the 2-year government bonds have turned positive on the day, maintaining the recent bullish trend.

The US 10-year Treasury yields were still lower at the time of writing but remained above 4.00% which it crossed on Wednesday for the first time since November.

Will gold succumb to pressure again?

Rising bond yields make gold less attractive, as it doesn’t pay any interest and costs money to store. The precious metal has managed to bounce back in recent days, but it is now testing its 21-day exponential average from below and resistance around $1850. Are we going to see renewed weakness here? If $1850 breaks on a closing basis then this could pave the way for a rise towards stronger resistance around $1880 to $1900 next.

USD/CAD eyes breakout ahead of BOC

Meanwhile, the USD/CAD looks poised for a bullish breakout as incoming data is continuing to provide more reason for the Fed to be cautious than declare victory on its fight against inflation, while the BOC is seen pausing its rate hikes at its meeting next week. So will the USD/CAD stage a bullish breakout above 1.3680 resistance?

Key macro events in the week ahead

 RBA rate decision (Tuesday) 

After starting it rate-hiking cycle in May of last year, the RBA has lifted the benchmark Cash Rate some 9 times to 3.35% at its most recent meeting in February. Analysts expect another 25-basis point hike at this meeting as the central banks has struggled to control inflation which reached a multi decade high of 7.8% in the last quarter.


BOC rate decision (Wednesday) 

The BoC is not expected to hike rates further after a total of 425 basis points worth of interest rate rises. The central bank signalled in its previous meeting that it would pause to digest the impact of the last tightening. We have seen weakening growth, and slowdown in inflation, although job creation has been above forecast.

US non-farm payrolls (Friday)

The resilience of the US labour market in the face of rate hikes and high inflation has kept the Fed on a hawkish mode, which helped to keep the dollar supported last month. Will we see further evidence of a tight labour market?

— Written by Fawad Razaqzada, Market Analyst at
DISCLAIMER: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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