US dollar sell-off momentum grows

US dollar retreats against major currencies

The US dollar sell-off accelerated overnight, spilling over from major currencies and into a broad swath of developing market currencies as well. The price action looked much more momentum-driven, as opposed to fundamental.

That, in itself, highlights an increasing risk, suggesting that the overnight greenback retreat was powered by fast money. With Jobless Claims tonight, and Non-Farm Payrolls tomorrow in the US, we have two major risk points to negotiate. Disappointing data could see an oversold US dollar quickly rally as the FOMO herd stampedes back to the safety of the greenback.

Notably, the EUR/USD pair, which rose 0.50% overnight to 1.1875, has traced out a double top at 1.1910. A failure to close above that level this evening sets up a EUR/USD correction that could retrace as far as 1.1700. GBP/USD has now failed ahead of 1.3100 twice in the past week, and although its dips are shallow, it too has the potential to retrace back to the 1.3000 regions. The dollar index fell overnight but has traced out a double bottom at 92.55. Again, a failure to break this level implies that a short squeeze back to 94.00 could occur.

Regional South-East Asian currencies outperformed overnight, with SGD, MYR and THB all firming against the greenback. USD/MYR fell 0.70% to 4.1900, as oil prices climbed in overnight trade. The Chinese yuan also firmed, rising 0.50% to 6.9350 versus the dollar. USD/CNY carved through support at 6.9650, marking the start of a 300-point fall. Profit-taking has seen USD/CNY climb to 6.9385 this morning. If it weren’t for US event risk over the next 24-hours, my view would be that a test of 6.9000 could come as soon as early next week.

The US dollar weakness has paused in Asia, with major and regional currencies content to mark time until Europe’s arrival. The sell-off may resume at that stage. However, with the US dollar now oversold on short-term measures, and important event risk over the next 24-hours, joining the buy everything FOMO-crowd could be a risky business.

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