US Dollar Talking Points:
- The US Dollar continued its recent trend of strength as it works on its fourth consecutive weekly gain.
- The PCE report on Friday came out above expectations, printing at 4.7% against the expectation for 4.3%. This provided another boost for the USD as counterparts such as the Yen, Euro and British Pound showed relative weakness.
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US Dollar bulls continue to drive, and this was seen against the Euro, British Pound, and the Japanese Yen over the past week. The big question now is whether we’re on the cusp of another trend similar to what showed in the first nine months of last year, when USD strength dominated currency markets as driven by higher rates across the US treasury curve.
On the fundamental front, US data has shown strenth as illustrated again on Friday with the release of PCE data for the month of January. This is the Fed’s preferred inflation gauge and since the September report (that was released in October), PCE has continued to move-lower until this morning’s release printed at 4.7% against a 4.3% expectation and a prior print of 4.4%.
Core PCE YoY (Jan 2021-Present)
Chart prepared by James Stanley
That October period was a key spot for macro risk trends. That’s around the time that the S&P 500 established its current yearly low, and it’s also just a little after the US Dollar began to retreat from resistance. US treasury rates were pulling back, driven by the prospect of a ‘soft landing’ and the idea that the Fed may be able to pause rate hikes at some point in the not-too-distant future. Since then, risk trends have been largely favorable for bulls, with recent change starting last Thursday after some comments from St. Louis Fed President, James Bullard, who highlighted the prospect of more hikes from the FOMC in effort of addressing inflation. And as US economic data continues to print with strength, such as the earlier month blowout NFP report or the most recent PCE release, rate hike odds are continuing to nudge higher for the next FOMC meeting on March 22nd.
On that front, the probability of the Fed hiking by 50 basis points at that March rate decision have increased over the past month, with a scant 2.8% probability a month ago and 18.1% last week rising to a 32.9% probability as of this writing (data derived from CME Group’s Fedwatch tool).
As US rates continue to increase, this can drive USD strength as rollover or swap for USD moves higher. This can be evidenced in the Japanese Yen, which embarked an a massively strong bullish trend last year as driven by the carry trade.
March FOMC Rate Hike Probabilities, Per CME Group’s FedWatchData derived from CME FedWatch, as of February 24th, 2023
US Dollar (via DXY for reference purposes only)
The US Dollar put in its fourth consecutive weekly gain and crossed above a key level last week at the 105.00 area, which had provided some element of resistance since early-December.
The re-emergence of the bullish theme is still in its early days, however, as taken from the Fibonacci retracement derived from the pullback move. The 23.6% retracement of that move helped to hold the highs last week, and at this point prices have yet to encroach on the 38.2% retracement, which plots at 106.15. If buyers can force a breach above the 50% marker, the prospect of bigger picture bullish trends coming back into the DXY could look more attractive; but for that to come to fruition, there’s likely going to need to be a continued push from bears in EUR/USD and/or GBP/USD.
US Dollar (via DXY) Weekly Chart – Indicative Only, not Available on Forex.com platforms
Chart prepared by James Stanley; data derived from Tradingview
The euro makes up 57.6% of the DXY basket so, in many ways, the above chart is highly vulnerable to shifts in the single currency. And as USD strength priced-in last week via DXY, EUR/USD continued to push lower to continue the bearish move from the rising wedge formation.
The current nine-month-high in the pair plots right around the 76.4% Fibonacci retracement of the February-September major move. Since then, bears have taken on a greater and greater role in EUR/USD price action as evidenced by the progression of lower-lows and lower-highs.
At this point, EUR/USD prices are nearing a re-test of a key zone of support, taken from around the 1.0500 level. This zone was in-play earlier in the year, helping to provide support at a confluent spot on the chart before the bullish trend extended. In this area, there’s the 1.0500 psychological level, a Fibonacci level at 1.0515 and at the time of the most recent inflection, there was also a trendline projection, as taken from the bearish 2022 trend in the pair last year. That inflection adds another point of reference at 1.0482 which now functions as the two-month-low in the pair.
If bears can take-out this area next week, when we’ll see a slew of European inflation reports alongside PMIs out of the United States, the prospect of a bigger picture reversal will take on more life, and this brings to the equation deeper supports, such as the 1.0350 level after which the 1.0282 Fibonacci level comes into the picture. And on a longer-term basis, the parity level still looms large, which is confluent with the 23.6% retracement of the same major move reference above.
EUR/USD Daily Chart
Chart prepared by James Stanley, EUR/USD on Tradingview
I had looked into GBP/USD earlier in the week and, at this point, the pair continues to hold two conflicting technical formations.
On a longer-term basis, the double top remains, but that doesn’t trigger unless bears can push through the neckline which plots at the current three-month-low in the pair, which is very nearby the 38.2% Fibonacci retracement of the 2021-2022 major move. On a shorter-term basis, there’s still a falling wedge formation, which is often approached with aim of bullish breakout potential.
Technically, both formations could come to fruition: This would need to show an initial breakout from the wedge, after which sellers show up at a lower-high, thereby keeping the double top in order. And the neckline to the double top would then need to give way to trigger that formation.
And, in effort of complete balance, one or both formations could be nullified. If sellers continue to push and are able to elicit a breach of 1.1835 next week, the support side of the wedge would be violated, which would negate that formation while triggering the double top; or conversely if the wedge leads into a bullish breakout and if buyers are able to elicit a push beyond the 1.2447 double top, that formation would be invalidated.
GBP/USD Daily ChartChart prepared by James Stanley, GBP/USD on Tradingview
USD/JPY put in a massive bullish trend last year, eventually running up to fresh 32-year highs. Prices in the pair tested above the 150 area, eventually setting that fresh high on October 21st of last year. But as the USD began to pullback, the carry trade that drove the pair so aggressively as US rates were rising began to unwind.
And when carry unwind hits, it can be aggressive, as the adage alludes ‘up the stairs, down the elevator.’ In a little under three months, 50% of the bullish trend that took 21 months to build was erased. The 50% retracement of that major move helped to set support in January at the 127.27 level. And much as we’ve seen with USD, bulls are coming back into the matter although it would still be early stages for re-emergence of the big-picture bullish trend.
As a comparison to DXY above, which found resistance around the 23.6% level of the pullback move last week, USD/JPY closed last week’s bar above its own 23.6% level, and price action is making a fast approach at the 38.2% retracement which plots at 136.67. This could keep the pair as an attractive candidate for USD bulls.
USD/JPY Weekly Price Chart
Chart prepared by James Stanley, USD/JPY on Tradingview
From the daily chart of USD/JPY, we can see a bullish engulfing formation as prices have burst above prior resistance (daily close needed for confirmation). Bullish engulfs are often tracked with the aim of momentum continuation, and this puts the focus on area of prior support-turned-resistance plotted at the 138.06 level. Above that, there’s a major area around the 140.00 psychological level, which can be spanned down to the 50% mark of the recent pullback move to make for a ‘zone’ of resistance potential sitting overhead.
USD/JPY Daily Chart
Chart prepared by James Stanley, USD/JPY on Tradingview
--- written by James Stanley, Senior Strategist
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