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Was that the USD top for now?
John J. Hardy
Global Head of Macro Strategy
Résumé: EURUSD punched down to test the key 1.1200 area and has rebounded sharply ahead of US-China trade talks this weekend. This is the first key area for USD bears to take a stand.
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The technical market read: the USD rally punched through key resistance yesterday, as EURUSD dropped down through 1.1266 range support and EURUSD and followed through to test 1.1200 in the Asian session overnight before rallying to start the day in Europe. USDJPY squeezed to new local highs but shied away from a full test of the March 146.54 low as it peaked at 146.19 overnight and lurched into a steep retreat, trading 145.20 as of this writing. These are solid signs that USD bears are taking a stand near key levels that now offer traders key risk levels for testing the bearish case. Some further confirmation that the US dollar has put in a top here would be a solid close near 1.1300 or higher in EURUSD and a firm rejection of the USDJPY rally – perhaps 144.00 or lower. The latter has been particularly treacherous of late as the recent bearish reversal in early May was useless.
If the USD sell-off falters again, the next critical areas lower in EURUSD are the 1.1050 level I have discussed before and arguably 150.000 in USDJPY.
Chart: EURUSD
EURUSD tested all the way to 1.1200 overnight, the key major figure near the 2024 high of 1.1214. A first step to re-establish the bullish case would be a close back above 1.1300 and thus into the former range. If the pair fails to find support here and slips to new lows, the next critical area looks like 1.1050-ish.
The market narrative: the US dollar looks somewhat loosely correlated with risk sentiment in US equities and positive expectations on trade deal prospects. On that note, we got the US-UK trade deal which is a hodgepodge of carveouts that on balance benefit the US somewhat more and leave many important areas unaddressed, like digital services and regulatory standards on food, etc. More interesting than the terms is simply the fact that the UK agreed to move forward with this kind of deal, as it is in complete violation of WTO rules, a recognition that we are in a new era of bilateral relationships with profound implications. And now we have the EU moving ahead with proposing tariffs on a EUR 100 billion in US imports as well as threatening to launch a dispute with the US at the WTO. This will not go well if the EU goes down that path – the WTO is no longer relevant in this new era. Is the EU really ready to start a trade war with the US? Traveling this path will eventually sow massive discord among EU members.
Looking ahead, the next key event risk is the US-China trade discussion in Geneva starting tomorrow. US Commerce Secretary Lutnick said that negotiations will take far more time with South Korea and Japan – two strong US allies in national security terms. Given the testy US-China relationship and the complexity of the situation, how can we expect anything specific, much less anything strongly on the positive side this weekend? Still, let’s watch closely for how the “tone” of the discussions is spun, whether positive or negative.
BoE and other CB’s yesterday. The Bank of England drove a brief bout of sterling strength yesterday on the two dissenting hawks that were not anticipated (certainly not by me) and short UK rates jumped 10 basis points in the immediate wake of the decision. Sterling can continue its recent strength if we continue to rally into the sky in UK and global equities, but would likely face headwinds in the crosses if we see another bout of equity market selling. The 0.8450-0.8500 area in EURGBP is pivotal. “Other CB’s” includes Sweden’s Riksbank, which tilted dovish as I anticipated, but failed to see any reaction in SEK. The Norges Bank simply recycled language on cuts later this year.
FX Board of G10 and CNH trend evolution and strength.
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The latest USD surge has further reduced the strength of the US dollar bear trend, while the JPY comeback short circuited further yesterday, keeping the outlook murky there (more global risk aversion probably the key ingredient needed for JPY strength).
Table: NEW FX Board Trend Scoreboard for individual pairs. EURGBP is on tilt for flipping to a negative trend according to our trend indicator (which will turn negative at current levels if we close near here today), but technically it is in no-man’s land in the 0.8450-0.8500 zone as discussed above. Note that AUDNZD is close to the tipping point of establishing a new uptrend.