Central bank tightening sends US dollar lower

US dollar retreats as central banks hike

The US dollar fell overnight as traders turned short of USD/JPY ahead of the BOJ meeting, and central banks in the UK and Switzerland hiked policy rates. A rotation from equities to bonds overnight drove down US yields, further eroding short-term support. The dollar index slumped by 1.0% to 1.0380 overnight but has recouped some of those losses in Asia, rising 0.37% to 104.18 as USD/JPY rallies on the just-released no change from the Bank of Japan. The dollar index has support at 1.0350 with resistance now distant at 1.0570.

EUR/USD rose 1.0% to 1.0550 overnight as USD/CHF weakness and lower US yields boosted the single currency. The rally looks more to do with temporary US dollar weakness and the SNB, rather than a vote of confidence in the Eurozone. It has eased 0.20% to 1.0530 in Asia, and has initial resistance at 1.0600, the overnight high, with challenging resistance at 1.0650. Support is distant below 1.0400 now although I note that EUR/USD has traced out to bottoms at 1.0350. It is a bit too soon to judge whether the current euro bearish outlook has turned though.

Sterling traded in a 300-point range overnight, but a 0.25% Bank of England hike, with hints of more to come, won the day for sterling, GBP/USD closing 1.45% higher at 1.2353. Probably the main supportive factor was the BOE split decision on a 0.25% versus 0.50% rate hike, suggesting the latter is possible at later meetings with UK inflation expected to hit 11.0% this year. GBP/USD has initial resistance at 1.2400 and 1.2500, with support distant at 1.2200 and then 1.1950.

USD/JPY slumped 1.20% to 132.20 overnight as the offshore market positioned for a possible lifting of the Bank of Japan JGB target of 0.25% today. Japanese markets spoke loudest though, immediately lifting USD/JPY through 133.00 this morning. The BOJ has just announced no change to its policy setting and USD/JPY is now 1.05% higher at 133.65 today. With the BOJ unchanged, and the Federal Reserve now on an aggressive hiking path, it seems just a matter of time before the US/Japan rate differential reasserts full control of the cross. A return to 135.00+ appears to be the path of least resistance. Last night’s low of 131.50 could well be the bargain of the month for some lucky buyer.

A weaker US dollar lifted the AUD and NZD overnight. AUD/USD rose by 0.70% to 0.7050, and NZD/USD rose 1.23% to 0.6365. A stronger greenback in Asia has pushed both 0.35% lower to 0.7025 and 0.6340 today. Both Australasians have traced out bottoming patterns this week on the charts and as long as 0.6850 and 0.6200 hold respectively, further gains to 0.7150 and 0.6450 cannot be ruled out initially.

Asian currencies rallied overnight, led by the usual sentiment indicators, the KRW, THB, and CNH, with SGD, MYR, INR, and IDR having little to show for overnight US dollar weakness. USD/THB has risen by 0.70% today, unwinding most of the THB strength, while USD/CNH has gained 0.36% to 6.7100 as the USD/JPY rallies. The price action in the Asian currency space has not given too many clues this week, other than USD/Asia continues to consolidate at or near its recent highs. That suggests that they remain vulnerable to further weakness into next week, despite the US dollar retreating against the DM space overnight. ​

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