Risk aversion lifts the US dollar

Recession jitters boost US dollar

Currency markets had a roller-coaster session with European and US investors piling into haven US dollars from the get-go on recession fears. Weak bank earnings were another headwind and at one stage EUR/USD had fallen nearly 100 points to 0.9950. Only soothing comments from two Fed officials placing their markers in team 0.75% allowed some calm to return. The US dollar gave back some of its gains but still finished broadly higher. Asian markets are notable for the complete lack of volatility today, and seem content to ride out the week ahead of US retail sales data this evening.

The dollar index finished 0.57% higher at 108.55, where it remains in Asia today. Resistance is at 109.30, the overnight highs, and 110.00. Support is at 107.50 and then the 1.0585 breakout point, followed by 1.0500. ​ The relative strength index indicator (RSI) is overbought, signalling a potential correction lower by the US dollar.

EUR/USD collapsed to near 0.9950 overnight, with stop-losses kicking in after a clean break of 1.0000. However, rate hike comments from Fed officials allowed the single currency to claw back most of those losses, finishing 0.37% lower for the session at 1.0020, an impressive result. ​ It has managed to edge higher to 1.0030 in Asia. The oversold RSI and underwhelming post-inflation performance by the US dollar suggests the euro could be tracing out a low for now and a correction back towards 1.0200 is possible. EUR/USD has support at 0.9900/25. It has resistance at 1.1020, the overnight high, and then 1.0200.

GBP/USD followed the euro overnight, finishing 0.55% lower at 1.1830, where it remains in Asia. It has support at 1.1760 and resistance is at 1.1965, followed by 1.2060 and 1.2200.

USD/JPY continued rallying overnight as US short-dated yields rose, finishing 1.40% higher at 138.95, where it remains in Asia. Having traded as high as 139.30 overnight the yen is the most obvious loser in the forex space of the combination of recession fears and interest rate differentials. USD/JPY’s next resistance is at 140.00, with support at 137.40 and 136.00. A soft US retail sales number could be the catalyst for a long overdue downside correction.

Asian currencies retreated overnight, led once again by the Korean won and Thai baht. Ominously, both the Singapore dollar and Philippine peso gave back almost all of their gains from yesterday after their central banks unexpectedly tightened monetary policy. USD/MYR has risen through 4.4500 today, and USD/CNY rose back above 6.7600 as well. It looks like central banks in India and Indonesia are capping gains on USD/INR and USD/IDR for now. The inability of Asian FX to rally on US dollar weakness like the DM-space overnight suggests that more downside lies ahead, especially if strong retail sales in the US tonight put a 1.0% Fed hike back on the agenda. Next week, the onus will be on Bank Indonesia to raise policy rates or 15,000.00 may become its new starting handle.

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