• AUD/USD dropped to its lowest level since early April on Thursday.
  • US Dollar Index stays within a touching distance of 92.00.
  • Market participants largely ignored uninspiring data releases from US.

The AUD/USD pair extended its slide after posting heavy losses on Wednesday and dropped to its lowest level since April 1 at 0.7539 on Thursday before going into a consolidation phase. As of writing, the pair was trading at 0.7557, losing 0.7% on a daily basis.

DXY climbs to multi-month highs

The unabated USD strength remained the main market theme following the hawkish shift seen in the FOMC’s updated Summary of Projection, the so-called dot plot. The publication revealed that the number of policymakers who see a lift-off in the fed funds rate from zero in 2023 rose to 13 from seven in March. 

Following Wednesday’s 1% jump, the US Dollar Index (DXY) preserved its bullish momentum and advanced to its strongest level in more than two months at 92.00 during the American trading hours on Thursday. As of writing, the DXY was up 0.5% on the day at 91.84.

Meanwhile, the data from the US revealed that the Initial Jobless Claims rose to 412,000 from 375,000 and the Philadelphia Fed’s Manufacturing Index edged lower to 30.7 in June from 31.5 in May. Nevertheless, these figures had little to no impact on the greenback’s performance against its rivals.

On the other hand, the Australian Bureau of Statistics announced earlier in the day that the Employment Change in Australia jumped to +115,200 in May, surpassing the market expectation of +30,00 by a wide margin. However, AUD/USD’s positive reaction to this data remained short-lived with investors staying focused on the USD’s valuation.

Technical levels to watch for

 

  • GBP/USD bears seeking a break of the 1.3890 for 1.36 area targets.
  • US dollar is not letting up on hawkish Fed hold.
  • All eyes will turn to the BOE next week following the UK CPI print this week.

GBP/USD is currently trading at 1.3924 and down around 0.4% in the afternoon New York session attempting to correct the steep bearish decline. 

Cable has traded between a high of 1.4008 and a low of 1.3895 on the day so far, reeling in the wake of US dollar strength. 

GBP took back a little ground vs the G10s earlier in the week on the release of the stronger than expected UK Consumer Price Index data with sufficient strength in the release to spark a little more interest in the Bank of England’s next policy meeting on June 24.  

However, that was before the Federal Reserve came along and took the markets by surprise with a hawkish hold.

The hawkish tone from yesterday’s meeting and dot plot that now shows a faster-than-expected pace of tightening weighed on risk sentiment and sent US yields and the greenback higher.  

Fed Chair Powell described this week’s meeting as the ‘talking about talking about’ meeting.

Markets took this as a sign that members are now seeking a plan to reduce the pace of QE while they’re bringing forward their projections from flat to +50bp in rate hikes by end-2023.

The combination has continued to percolate through markets with knee jerk reactions in the dollar extending into today’s trade despite the bullish data overnight from New Zealand and Australia. 

The DXY has powered ahead is trading at the highest since April 13, taking on the 92 level with a high after easily breaking above the 200-day moving average near 91.538.  

Bulls now have sights on a test of the March 31 high near 93.437.  

However, is the Fed really that close to hiking and has the market overshot?

The market has been building US dollar shorts for a considerable time and the volatility on forex has been at its lowest in over a year for just as long. 

There is a lot of pent up demand in the markets and traders are seeking to survive on more than just the carry.

In the opinion of analysts at Brown Brothers Harriman, the Fed is not close to hiking, ”but it is moving closer.”

”Of note, there was no language in the official statement about tapering.  In terms of updated forecasts, Fed sees core PCE at 3.0% this year vs. 2.2% back in March, 2.1% in 2022 vs. 2.0% in March, and 2.1% in 2023 vs. 2.1% in March. 

Lastly, the Fed raised the IOER by 5 bp to 0.15% but this was a purely technical move to help move effective Fed Funds off the zero bound in the face of ultra-abundant liquidity.”

”Powell noted that the Fed will continue to assess progress towards its dual mandate in coming meetings but that it’s “still a ways off.”  If his outlook is to be believed, that time is not as far off as the market thought,” the analysts also explained. 

Importantly, the analysts also noted that the 10-year breakeven inflation rates are down 6 bp on the hawkish hold.  

”That is, the market has even more confidence that the Fed won’t let inflation get out of hand.  With the 10-year yield up 7 bp, the real yield has risen 14 bp to -0.76%, the highest since April 19.  

This is dollar-positive and we think there’s room to go even higher.”

All eyes on the BoE

Meanwhile, as for the pound, market participants appear to be comfortable in the view that much of the inflation experienced this year in the UK will have a transient nature.

However, there is significant uncertainty around the length of time current supply bottlenecks will take to dissipate, analysts at Rabobank said. 

”This uncertainty has given way to the debate as to whether inflation expectations will be impacted and whether price pressures in the forthcoming economic cycle could be higher than in recent history.”

”In the UK, the inflationary argument is made all the more interesting by reports that Labour supply could be diminished as a consequence of the confluence of Brexit and the pandemic.”

The analysts argued that could have the potential to impact wage inflation in the UK. 

Following the CPI print, this makes for the next labour market report and BoE meeting an important set of events, especially given the shift the Fed for which policymakers will be paying close attention. 

At the end of last month, the MPC’s Vlieghe did suggest that a rate hike was possible in the first half of next year if the job markets bounce backs.  

GBP bulls will be looking for any less dovish takeaways from the Bank next week.

On the other hand, ”we see current headwinds for the pound in the shape of the delayed re-opening of England’s economy and potentially as a result of tensions with the EU over the Northern Ireland protocol which have raised the threat of a trade war,” the analysts at Rabobank warned. 

GBP/USD technical analysis

Techcnailly, analysts BBH said that sterling needs to break below $1.3890 to set up a test of the April 12 low near $1.3670. 

 

 

  • WTI suffers heavy losses for the second straight day on Thursday.
  • Broad-based USD strength seems to be dragging crude oil prices lower.
  • Lack of progress in Iran nuclear talks further weighs on WTI.

After reaching its highest level since October 2018 at $72.96 on Wednesday, the barrel of West Texas Intermediate (WTI) made a sharp U-turn and snapped a four-day winning streak, losing more than 1%.

Although WTI stayed relatively quiet around $72 during the European trading hours, it came under renewed bearish pressure and dropped to its lowest level in nearly a week at $69.75 before rebounding modestly. As of writing, WTI is trading at 1.72% on the day at $70.45

DXY rally remains intact

The broad-based USD strength following the hawkish shift witnessed in the FOMC’s Summary of Projections seems to be the main market theme in the second half of the week. Currently, the US Dollar Index (DXY) is trading at its highest level in more than two months at 91.90, rising 0.55% on a daily basis.

Meanwhile, investors remain cautious about Iran and the US coming to an agreement on nuclear talks that could lead to the lifting of sanctions on oil exports ahead of the upcoming election in Iran on Friday.

Technical levels to watch for

 

In an interview with Germany’s Handelsblatt daily, Jens Weidmann, European Central Bank (ECB) Governing Council member and Bundesbank President, called for the ECB to end the Pandemic Emergency Purchase Programme (PEPP) to end soon, per Reuters.

Additional takeaways

“Condition for a normalisation of monetary policy is a robust economic recovery, end of main measures to end the pandemic.”

“I believe this will happen in 2022.”

“Inflation in Germany is only temporary.”

“No indication of excess wage hikes in Germany.”

Market reaction

These comments failed to help the shared currency find demand. As of writing, the EUR/USD pair was down 0.73% on the day at 1.1906.

  • Euro remains under pressure versus US Dollar, DXY eyes 92.00.
  • Greenback extends gains even amid lower US yields.

After a brief consolidation pause, the EUR/USD resumed the downside and broke under 1.900, falling to 1.1890, the fresh two-month low. The pair has now fallen almost three hundred pips from the level it had a week ago.

USD, the shinning start no matter what

The US dollar printed fresh highs against most G10 currencies. In that group the yen is the outperformer on Thursday, still the greenback is the best of the week.

The fresh high of the US dollar took place even as US yields decline sharply. The 10-year is falling more than 6.35%, now under 1.48%, and even below the level it had prior to the release of the FOMC statement that triggered the rally of the greenback.

Equity prices are mostly lower in the US. The Dow Jones drops 0.93%, the S&P 500 falls by 0.38% while the Nasdaq gains 0.38%. Caution still prevails among investors driving demand for the US dollar.

The EUR/USD is on its way to the lowest daily close since April 7, the first one under the 200-day moving average in two months. Despite oversold readings in technical indicators, the momentum is still sharply negative, with the negative tone intact. On the downside, the next support might be seen around 1.1870/75.

Technical levels

 

The Central Bank of the Republic of Turkey kept the key interest rate unchanged at 19%, as expected on Thursday. According to the Research Department at BBVA, the worsening inflation outlook and potentially increasing global yields after Wednesday’s FOMC meeting will require the Turkey central bank to be more cautious.

Key Quotes: 

“The Central Bank of Turkey kept the policy rate at 19% in line with the expectations.”

“Given the worsened inflation expectations, the CBRT repeated the need to decisively keep the current “tight” monetary policy stance. Thus we expect an easing cycle only very gradually in late 3Q and end the year with 16% policy rate.”

“All in all, if the potential impact of the reopening in the economy is considered as we confirm with our Big Data demand indicators, the uncertainty increased further on inflation, given the delayed demand and supply – side factors. Therefore, worsening inflation outlook and potentially increasing global yields following the hawkish messages of the FED will require the CBRT to be more cautious, which the CBRT tries to manage right now by trying to eliminate any early rate cut expectations.” 

  • Mexican peso recovers some lost ground versus the US dollar after falling to the lowest since March.
  • USD/MXN flat on Thursday after a pullback from 20.62.

The USD/MXN peaked on Thursday at 20.62, the highest intraday level since late March. It then pulled back amid lower US yields and despite risk aversion. The pair dropped back under 20.50, and it is hovering around 20.35, marginally lower for the day about to post the first negative close since last Thursday.

The outlook now points to the upside, but the rally in USD/MXN calls for some precaution. While under 20.50, the odds of more gains seem limited. A close above the mentioned level would expose the next resistance seen at 20.60, followed by 20.80/85.

The daily RSI is approaching the 70 area, suggesting some consolidation ahead before another potential leg higher. The USD/MXN could trade between the 100-day moving average at 20.25 and 20.55. A slide below 19.95 would negate any upside bias, favoring more losses ahead.

USD/MXN daily chart

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