• AUD/USD is edging lower in the American session.
  • On a weekly basis, AUD/USD is up more than 100 pips.
  • US Dollar Index struggles to stage a meaningful rebound.

The AUD/USD pair rose to 0.7760 earlier in the day but lost its traction during the American trading hours. As of writing, the pair was down 0.2% on a daily basis at 0.7745.

In the absence of significant fundamental drivers, the pair seems to be making a technical correction as investors may be looking to book their profits following a three-day rally. 

Earlier in the day, the data published by the University of Michigan showed that the Consumer Sentiment Index improved modestly to 86.5 in April’s preliminary reading from 84.9 in March. Although this print came in weaker than the market expectation of 89.6, it failed to trigger a noticeable market reaction.

Meanwhile, the US Dollar Index is staying in a relatively right range a little above 91.50, allowing AUD/USD to limit its losses ahead of the weekend. 

AUD/USD near-term outlook

UOB Group analysts think that AUD/USD could re-test 0.7785 in the next 1-3 weeks. “While conditions remain overbought and momentum is beginning to wane, there is scope for AUD to make another push higher towards 0.7785,” analysts said. “Looking ahead, the next resistance is at 0.7820. A break of 0.7670 (‘strong support’ level was at 0.7645 yesterday) would indicate that the upside risk has dissipated.”

Additional levels to watch for

 

Russia’s foreign ministry announced on Friday that they will be expelling US diplomats proportionally to the US’ decision to expel Russian diplomats, as reported by Reuters.

Additional takeaways

“Will reduce the number of short-term visas issued to US diplomats.”

“We understand that we are limited in ability to cause economic damage to US.”

“Will ban US embassy in Russia from hiring citizens of Russia and third countries.”

“We would like to avoid further escalation with Washington.”

“We are ready for dialogue with US to find ways to normalise relations.”

“Eight high-ranking serving and former US officials responsible for Washington’s anti-Russian course will be banned from Russia.”

“We stand ready to cut US diplomatic presence in Russia to 300 people if Washington doesn’t change course.”

“Have options to hurt the US economically if Washington wants to continue a sanctions spiral.”

Market reaction

This development doesn’t seem to be weighing on market sentiment. As of writing, the S&P 500 Index was up 0.18% on the day at 4,177.

 

The EUR/USD extended its rebound during the week, finding resistance below the 1.20 zone. Analysts at MUFG Bank, see less pessimism around the euro as the pace of vaccinations picks up, and speculation builds over the potential slower pace of purchases from the European Central Bank (ECB) beyond the second quarter. 

Key Quotes:

“The EUR has started off on a stronger footing in Q2 with EUR/USD rising back towards the 1.2000-level after hitting an intra-day low of 1.1704 at the end of last month. Similarly, EUR/GBP has rebounded back above the 0.8700-level up from the intra-day low of 0.8472 earlier this month. It represents a marked turnaround in the performance for the EUR following heavy losses in Q1 when it declined by -4.1% against the USD and -5.0% against the GBP.”

“The recent reversal in EUR price action has been supported by favourable moves in yield differentials.”

“Market participants are already beginning to anticipate that the ECB will begin to scale back purchases in Q3. However, we do not expect the ECB to provide a clear signal as soon as next week on the pace of QE purchases beyond Q2. The recent pick-up in the pace of vaccinations in major euro-zone counties is helping to ease the pessimism towards the euro that built up in Q1, and will also ease some pressure on the ECB to maintain faster QE purchases for longer. The pick-up in the pace of vaccinations has been most evident in Germany and Spain which saw the total number of people who have received one dose increase by 56% and 63% respectively in the first half of this month.”

“The developments are creating a more favourable backdrop for EUR performance in the near-term. A break back above 1.2000 would reinforce upward momentum.”
 

“We should wean the economy at the earliest opportunity from the super-easy Federal Reserve policy,” Dallas Federal Reserve Bank President Robert Kaplan said on Friday, as reported by Reuters.

“The challenge will be finding the balance between being too preemptive and being too late on policy,” Kaplan added.

Market reaction

The greenback failed to capitalize on these bullish remarks. As of writing, the US Dollar Index (DXY), which tracks the USD’s performance against a basket of six major currencies, was down 0.1% on the day at 91.57. On a weekly basis, the DXY is down 0.66%.

Next Wednesday, the Bank of Canada (BoC) will have its monetary policy meeting. According to analysts at Wells Fargo, the central bank will keep rates unchanged at 0.25%. They consider the BoC could announce more tapering of its purchase program. 

Key Quotes: 

“As the economic outlook for Canada’s economy brightens, the Bank of Canada (BoC) has begun to offer signals and guidance about potential adjustments to its monetary policy path. Some of these adjustments have already occurred and are clearly evident in the BoC’s actions. For example, the size of the balance sheet has fallen perceptibly over the past few weeks. There have also been some noticeable changes in the composition of the BoC balance sheet. Holdings of Canadian government bonds continue to grow; however, Treasury bill holdings and total outstanding repo transactions are components of the balance sheet that have fallen. In addition, the BoC has discontinued some emergency liquidity programs and started to highlight the possibility of tapering asset purchases even further.”

“We believe the BoC will announce further tapering of its Canadian government bond purchases at its April 21 meeting, reducing its purchases to at least C$3 billion per week, from the current pace of at least C$4 billion per week. While we do not expect any changes to policy rates next week, we do feel the BoC will look to lift interest rates in the second half of 2022.”

A break above 1.20 could trigger a move to the 1.22 area, explained analysts at Rabobank. They expect over the months ahead the pair to trade in the range 1.17 to 1.20.

Key Quotes: 

“EUR/USD has trended higher since the start of April. While it has yet to break back above the 1.20 level it has come reasonably close in recent sessions. There are various fundamental factors behind the firmer tone in the currency pair stemming from both Eurozone and US. Technicals suggest that a break above the 1.20 level could trigger a move back to 1.22 and a rally could conceivably happen fairly quickly assuming stops above 1.20 are triggered.”

“While profit-taking is perhaps inevitable after a strong move in prices, the fundamentals behind the USD remain significantly better than at the start of the year. The strength of the fiscal spending from the Biden Administration and the optimism surrounding the US’s vaccine roll-out has shifted confidence in the outlook for the US economy, particularly given the disappointments over the vaccine roll-out in the EU and in Japan.”

“In the months ahead we expect choppy conditions in G10 markets with EUR/USD potentially mostly within a trading a 1.17 to 1.20 range.”

Analysts at MUFG Bank, see a potential trade idea of shorting the USD/CZK pair with an entry-level at 21.620, a target at 20.850, and stop-loss at 22.140. They point out pessimism over Europe is beginning to ease and the improving situation regarding the coronavirus will encourage expectations for rate hikes. 

Key Quotes:

“The recent pullback in long-term US yields despite much stronger US activity and inflation data has helped to dampen upside risks for the USD in the near-term. At the same time, the Fed continues to signal strongly that it will maintain loose policy well into the recovery.”

“In contrast, the EUR and Central European currencies including the CZK have been undermined in recent months by heightened concerns over disruption from the ongoing spread of COVID. The recent pick up in the pace of the vaccine roll out in the EU is challenging current market pessimism. At the same time, new COVID cases have dropped back sharply in the Czech Republic and reached their lowest level over the past week since late last year.”

“The positive developments are likely to encourage market speculation that the CNB will be able to carry through with plans to begin rate hikes between the end of Q2 and end of this year. Well ahead of rate hikes from the ECB and Fed. Over the past month, USD/CZK has also had one of the strongest positive correlations with global equity market performance.”
 

In an interview with CNBC on Friday, Fed Governor Christopher Waller said that they are happy to let inflation rise above 2%, as reported by Reuters.

Additional takeaways

“I don’t think anyone would be comfortable if inflation got to 3% or above and stayed there a while.”

“Dot plot is a problem right now.”

“It’s all about outcomes; we shouldn’t be doing calendar-based forecasts.”

“Markets are getting ahead of themselves in terms of expecting rate hikes.”

“If measuring by levels, we are still in a recession.”

“I’m thinking about it in levels, not growth rates.”

Market reaction

The greenback remains on the back foot after these comments and the US Dollar Index was last seen losing 0.15% on the day at 91.53.