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Daily Pivots: (S1) 134.48; (P) 134.85; (R1) 135.40; More...

USD/JPY continues to lose upside momentum as seen in 4 hour MACD. But further rise is still in favor to 38.2% retracement of 151.93 to 127.20 at 136.64. Strong resistance could be seen there to complete the corrective rebound. On the downside, break of 133.91 minor support will turn bias back to the downside for 129.79/132,89 support zone.

In the bigger picture, prior break of 55 week EMA (now at 131.54) raises the chance of medium term bearish reversal, but that's not confirmed yet. Strong rebound from current level, followed by sustained break of 38.2% retracement of 151.93 to 127.20 at 136.64 will argue that price actions from 151.93 is merely a corrective pattern. However, rejection by 136.64 will solidify medium term bearishness for 61.8% retracement of 102.58 to 151.93 at 121.43 and 38.2% retracement of 75.56 to 151.93 at 122.75.

St. Louis Fed President James Bullard told CNBC, "Our risk now is inflation doesn't come down and reaccelerates and then what do we do.

"We are going to have to react, and if inflation doesn't start to come down, you know, you risk this replay of the 1970s where you had 15 years and you're trying to battle the drag, and you don't want to get into that.

"Let's be sharp now, let's get inflation under control in 2023 and it's a good time to fight inflation because the labor market is still strong," He added.

Bullard reiterated his view that Federal funds rate at 5.25-5.50% rate would be adequate for the task.

The New Zealand dollar jumped after the Reserve Bank of New Zealand meeting but has pared most of these gains. In the European session, NZD/USD is almost unchanged at 0.6216.

RBNZ hikes by 50 basis points

The RBNZ delivered a 50 bp rate increase today, bringing the cash rate to 4.75%, its highest level since 2009. The move was widely expected, but a hawkish tone from the central bank gave the New Zealand dollar a brief boost. The rate statement noted that while there are signs that inflationary pressures are easing, CPI remains too high. The statement said that the cash rate “still needs to increase” in order to get inflation back to the Bank’s target of 1%-3%.

There is plenty of life left in the RBNZ’s rate-tightening cycle, as the central bank has forecast a peak rate of 5.5% later this year. The next rate meeting is in April, and as things stand, we can expect another 50-bp hike at that time. Inflation is running at a 7.2% clip and a 75-bp hike was a strong possibility at today’s meeting before Cyclone Gabrielle hit and caused damage in the billions of dollars. This is expected to dampen growth in the slow term, although the rebuild should boost inflation.

In the US, Manufacturing PMI was almost unchanged at 47.8, while Services PMI improved to 50.5, an 8-month high. The 50.0 level separates contraction from expansion, and both services and manufacturing have been in decline for months, as high inflation and rising interest rates have dampened activity in these sectors.

The Fed will release the minutes of its February meeting, when it delivered a 25-basis point hike. The markets will be interested in the extent of support for a 50-bp hike at the meeting. The blowout employment report and a strong retail sales release have forced the markets to come closer to the Fed’s stance, and there is now talk of more rate hikes this year, when only a few weeks ago the markets were confidently projecting rate cuts in late 2023.

NZD/USD Technical

• There is resistance at 0.6245 and 0.6357
• 0.6162 and 0.6049 are providing support

ECB governor François Villeroy de Galhau told French daily Les Echos that investors have "overreacted" to ECB communication since last week.

"There is an excess of volatility in the terminal rate expectations," he said. "Put differently, markets have overreacted a little since Thursday."

Villeroy also noted that while interest rate could peak by the end of summer, ECB is "in no way" obliged to raise borrowing costs at every meeting between now and September.

USDJPY had been trading within a downward sloping channel since mid-October when the price peaked at a 32-year high of 151.94. Nevertheless, the pair managed to break above this pattern in early February, with its strong advance currently approaching the 200-day simple moving average (SMA).

This positive short-term bias is also endorsed by the momentum indicators. Specifically, the RSI has jumped above its 50-neutral mark, while the stochastic oscillator posted a bullish cross within the 80-overbought zone.

If the upside tendency persists, initial resistance could be encountered at the 200-day SMA currently at 137.00. Piercing through that barrier, the price could ascend towards the December resistance region of 138.15. Should that barricade fail, the bulls might aim for the 142.24 peak registered in mid-November.

On the flipside, bearish actions could send the price to test the December support of 133.60. A break below that zone may shift the attention to 131.55, which acted as both support and resistance in the past two months. Failing to halt there, further declines could cease at the February support of 129.80.

Overall, USDJPY appears ready to recover a significant part of its losses after its bearish pattern broke to the upside. Therefore, the test of the 200-day SMA could prove to be the next decisive factor for the pair’s trajectory.

Germany Ifo Business Climate rose from 90.2 to 91.1 in February, matched expectations. Current Assessment Index dropped from 94.1 to 93.0, below expectation of 94.3. Expectations Index rose from 86.4 to 88.5, above expectation of 94.7.

By sector, manufacturing rose form -0.7 to 1.5. Services rose from 0.2 to 1.3. Trade rose from -15.4 to -10.6. Construction rose from -21.7 to -19.6.

Ifo said: "The German economy is gradually working its way out of a period of weakness."

Full release here.

The British Pound started a decent increase above the 1.2000 resistance zone against the US Dollar. The GBP/USD pair climbed above the 1.2050 level to start a recovery wave.

There was a close above the 1.2080 level and the 50 hourly simple moving average. It is now consolidating gains and trading near the 1.2110 zone. An immediate resistance is near the 1.2135 level.

The first major resistance is near the 1.2150 level. If there is a clear upside break above the 1.2150 resistance, the pair could rise steadily towards the 1.2200 level in the near term. The next major resistance sits near 1.2220 on FXOpen.

On the downside, the first major support is near the 1.2080 level. The main support is forming near the 1.2040 level and a connecting bullish trend line on the hourly chart. A break below the 1.2040 support could push the pair towards the 1.2000 support.

NZDUSD faced little volatility during the Asian trading session after a more-or-less expected 50bps rate hike by the Reserve Bank of New Zealand.

The pair keeps building floor around the 0.6200 level and marginally above the 200-day simple moving average (SMA), raising hopes for an upside correction, though with the RSI maintaining a downtrend comfortably below its 50 neutral mark and the MACD remaining negatively charged below its red signal line, the luck seems to be on the bears’ side. It’s also worthy to note that the 20-day SMA has slipped below the 50-day SMA, flagging a deterioration in the short-term trend.

Sellers could gain the upper hand if the pair resumes its negative trajectory below the 200-day SMA at 0.6180. Consequently, the price could slide towards the 38.2% Fibonacci retracement of the previous upleg at 0.6145, while a steeper decline may reach the 0.6100 region, which provided a footing back in November. Falling lower, the bears will next head for the 50% Fibonacci of 0.6025 and the 0.6000 psychological mark.

On the upside, there is a challenging border within the 0.6300-0.6365 region, where the key constraining line from December 2020, the 23.5% Fibonacci mark and the shorter-term SMAs are positioned. If the bulls manage to breach that wall, the recovery could pick up steam towards the 0.6465 resistance zone. Even higher, all eyes will turn to the 0.6550 bar, which has been a caution area since May 2022.

In brief, NZDUSD sellers could remain active in the coming sessions, waiting for a decisive close below the 200-day SMA to press the market lower.  

The US dollar index has lost around 12% since October 2022 till its local low at the end of January 2023. One of the major reasons for the devaluation was the oil prices decline. Combined with the 4.50% Fed rate hike since the beginning of 2022 and the launch of QT, this led to a 2.7% inflation drop, pressuring the greenback.

However, in February, the US dollar index gained over 3%, and there are some significant reasons for that move.

This article will discuss the drivers for the US dollar's further increase and look at the most popular trading instruments from the technical analysis side.

US Inflation m/m

Why the US Dollar Reversed?

On February 15, the Bureau of Labor Statistics published the CPI numbers for January 2023. The actual results overperformed expectations, with inflation rising 6.4% y/y versus the 6.2% y/y estimated.

The change in inflation has a time lag to the rate hike by the Fed, which slowed its pace in November and December, raising rates by 0.50% and 0.25%, respectively, after three consecutive 0.75% hikes.

Why is it so important? As soon as the Fed became less aggressive, inflation gave the first hints of an uptrend continuation, which sounds dangerous for the Fed and the US economy. The strong labor market added fuel to the fire. In January nonfarm sector added 517K jobs vs. 193K expected, and wedges gained 0.3% m/m. Moreover, Retail Sales increased by 3.0% in January vs. -1.1% in December, while the producer price index rose by 0.7% in January vs. -0.2 in December. All these factors prove that the US economy remains overheated, and prices might keep growing.

As a result, it looks like the Fed is failing in battle against inflation. That’s why most of the FOMC voting members in 2023 are hawks, who try to cool down the stock market and the US economy, which continues to grow.

If February’s report, expected in March, confirms that the prices continue to grow and the Fed has failed with its monetary policy, the markets might panic, and the US dollar will be the major beneficiary.

Another fact to pay attention to is an inversion of the US Treasuries yield curve.

US Treasury Yield Spread (10Y – 1Y)

An inverted yield curve occurs when yields on short-term bonds rise above the results on longer-term bonds of the same credit quality, which has proven to be a relatively reliable indicator of an economic recession.

As you can see in the picture above, the gray bars throughout the charts indicate the past US recessions since 1967. A quick look at the “Historical Treasury Yield Spread (10Y-1Y)” graph suggests that, historically, an economic recession generally follows once the yield spread drops below 0% (the red Y-axis). This is especially true for recessions during the late 1900s. The yield spread reached an all-time low of -3.16% around April 1980, during the economic recession of the early 1980s.

As soon as the recession finally happens, the US dollar will gain heavily against other currencies as the major safe-haven asset.

Technical analysis

DXY, Weekly timeframe

On the weekly timeframe, the US dollar index (DXY) broke above the ascending resistance trendline. Moreover, the price significantly reversed from the support level of 102.00, the 2008- and 2020-year highs. Thus, a combination of these factors confirms that the US dollar is still in a strong uptrend and that the recent decline is just a correction ahead of a massive rally.

The closest target for the US dollar is 114.00, a 9.5% gain. If the index breaks above this resistance, it will move to 120.00, gaining another 5%.

EURUSD, monthly timeframe

In 2022 the EURUSD broke through a global support trend line stated in March 1985. Recently, the price tested the breakout from below 1.1000 and bounced back. Also, it is noticeable that the pair has been moving in a strong downtrend since 2008. We expect this trend to continue with EURUSD heading toward the 2000s low at 0.8500.

XAUUSD, Weekly timeframe

XAUUSD is forming a global “cup and handle” pattern. A breakout of the upper border of the handle will open the way to 2800.00 for the yellow metal. Fundamentally, it might be caused by a global financial crisis or geopolitical conflict.

However, in the short term, the price may decline to the lower border of the handle, which is around 1600.00.

Conclusion

Learning global trends is an essential thing for every trader. After observing macroeconomic numbers and technical analysis of high timeframes, we can conclude that the world is facing a recession. And the only question remains: When will it begin? Usually, the financial crisis begins when the US treasures yield curve returns above 0. Thus, feel free to use this indicator to predict global trends in the future.

Gold remains under pressure and risk is still to the downside as prices continue to drift lower from the 1,847 key level and the short-term simple moving averages (SMAs). The technical oscillators are looking neutral and point to more weakness in the market. Looking at the 4-hour chart, the RSI is pointing marginally down below the 50 level, while the MACD is moving sideways near the zero level.

The next target to the downside is the 1,830 support level. At this stage, the market would likely see a resumption of the downtrend from the 1,959 peak and overrun the 1,819 mark ahead of the 1,800 low, registered in December 2022.

Upside moves are likely to find resistance at the 50-period SMA near 1,847 before hitting the 1,870 barrier. There is an important resistance zone between 1,890 and 1,900, which encapsulates the 200-period SMA.

In the short term, the bearish phase remains in play especially if gold prices continue to trade below the SMAs and only a jump above the 200-period SMA may change the outlook to positive.