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FX Update: USD set to extend this leg higher?

Forex
Picture of John Hardy
John Hardy

Head of FX Strategy

Summary:  The US dollar is breaking through resistance in places, challenging critical levels in USDJPY and GBPUSD and testing new local lows in EURUSD as well after a firm US Retail Sales report for April yesterday. Today we look at levels that could further cement the chances for a more significant USD comeback if not a full-blown shift in the longer-term outlook for the currency.


Today's Saxo Market Call podcast

FX Trading focus:

  • USD taking a stab at breaking up this morning – what could drive an extension and the next levels to look for.
  • AUD and JPY weak on weak metals, firmer yields

Trading and bias notes:

  • USD: Testing new highs in places (EURUSD support 1.0850 broke – more below) and confirming some of the recent USD-bullish reversals, not sure what gives it tactical momentum unless we get a stickier sell-off in treasuries or something that impacts risk sentiment more broadly. No obvious major catalyst until possibly G-7 meeting this weekend or, more importantly, USD ceiling issue clearing (which should play USD-bullish).
  • NZD: NZDUSD has found resistance ahead of 0.6300 and bears happy to remain bearish below that level, but NZD firm on very weak AUD (AUDNZD spilling far below the 1.0700 area and thus shifting focus back for downside trend continuation
  • GBPUSD: yesterday rewarded the bears and testing below local support now near 1.2450 and bears can bring down stops to slightly above 1.2500.
  • USDJPY: Risk of big swing higher if US 10-year treasuries pressure top of range and toward 3.75%, and as recent bearish reversal setup now rejected. 200-day moving average in play today.

USD breaking higher: drivers and next steps.

The US dollar is breaking higher this morning, in part as momentum spills over from yesterday’s pop higher in US treasury yields on the release of the stronger than expected US Retail Sales for April, although the move in yields didn’t move that convincingly and only the 30-year benchmark US treasury yield has threatened above interesting range highs.

So one driver is firmer US data not quite fitting the narrative of an incoming recession, but I suspect the larger driver here could simply be on  on a reduction of USD short positioning on the prior “policy divergence” narrative that drove EURUSD above 1.1000 and even GBPUSD above 1.2600, that the ECB and BoE still had some considerable further room to continue tightening policy rates while the Fed was set to pause and could even be easing by late Q3.  That narrative reached its apex and simply can’t be extended further in the near term, barring a sudden and ugly emergency in the US that doesn’t spill into global risk sentiment. Arguably, that something could be the debt ceiling issue. But that issue is a double-edged sword, as we all can anticipate extensive pressure on USD liquidity (USD-positive) from the moment a deal is hammered out and the US Treasury has to rebuild its account at the Fed by hundreds of billions of USD, issuing a flurry of treasuries.

Latest on debt ceiling talks: There were few developments of note from talks yesterday between House speaker McCarthy and the Biden White House, although the former at least once expressed the hope that this week could see a deal move nearer, while observers suggest it is promising that White House representatives are willing to negotiation with Congressional Republicans.

What to watch next: From here, we will continue to watch US data that continues to roll in, although this is mostly minor until the week after next. Initial weekly claims tomorrow are the next data point of note and then next Friday the 26th we have both the PCE inflation data for April and the final University of Michigan Sentiment survey for May, the preliminary version of which showed the pop in long-term inflation expectations to the highest since 2011. Otherwise, US treasury yields are an important coincident indicator for whether this USD move will develop more energy or reverse – a break higher in long treasuries the most likely to generate the most volatility. And watching USDCNH, which just crossed above the important 7.00 level in today’s trade.

Chart: EURUSD
EURUSD pushed lower through the local 1.0850 lows, getting a bit of extra fuel in today’s session from a final Eurozone headline CPI that was revised slightly lower (to 0.6% MoM vs. 0.7% originally estimated). The pair is entering an important zone here, with the 100-day moving average looming into view just above 1.0800 (it proved pivotal support back in March). The bigger capitulation level that more firmly would set up expectations for a test of the 1.0500 range lows (also near the 200-day moving average) is the 61.8% of the entire rally sequence from the March lows at 1.0737. To test 1.0500 I suspect we would need a range break to the upside in treasuries, aggravated risk aversion whatever the cause, or to be on the other side of a debt ceiling solution.

17_05_2023_JJH_Update_01
Source: Saxo Group

AUD and JPY weak on metals slump, yield rise respectively.
The AUD is weak in the crosses ahead of the employment data tonight and despite the surprise hawkish shift from the RBA of late as weak metals prices remain a negative drag (a big shadow over Aussie across the board as long as copper remains below its 200-day moving average) and as negative Chinese data has weighed this week, with USDCNH sprinting higher into 7.00+ a further negative focus for the Aussie. For the yen, it is simply the rebound in US treasury yields that has the JPY lower across the board again, possibly as well due to a slightly negative surprise in the GDP deflator reading in Japan’s otherwise strong Q1 GDP estimate out overnight. Do note that USDJPY has been interacting with its 200-day moving average again.

Table: FX Board of G10 and CNH trend evolution and strength.
The US dollar has spilled above resistance in today’s trade – watching for follow-on action if the break holds and coincident indicators as discussed above.

17_05_2023_JJH_Update_02
Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
An increasing number of USD pairs flipping into positive trending territory, with USDCHF making a bid to pull higher and GBPUSD threatening a flip to negative today. The NZDUSD situation is finely balanced, most likely due to AUDNZD capitulation. Note Gold also now trending lower on the break below 2,000 as long as today’s move holds.

17_05_2023_JJH_Update_03
Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (All times GMT)

  • 1230 – US Apr. Housing Starts / Building Permits
  • 1700 – US Treasury to auction 20-year bonds
  • 0130 – Australia Apr. Employment Data

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