US dollar index testing support

The US dollar retreated overnight once again, even as Ukraine hopes faded as quickly as they began. US bond yields moved lower once again, undermining the greenback. For now, the US yield curve seems to be pricing in the worst of the impact of impending Fed rate hikes, and with no new developments in Eastern Europe, bond buyers appear to be tentatively returning. Lower oil prices today will assist that, as will confirmation of the Biden SPR plan today. Of course, that could all change if we get a monster US Non-Farm print tomorrow night.

That has left the dollar index to fade once again, falling 0.58% to 97.84 overnight, where it remains in moribund Asian trading. That leaves the index just above support at 97.70, which it tested overnight. With an imperfect triple bottom traced at that level, a sustained break will signal a deeper US dollar correction lower, possibly extending to 96.50.

EUR/USD continues to benefit from US dollar weakness, rising 0.60% to 1.1160 overnight, edging higher to 1.1165 in Asia. EUR/USD has now broken through resistance at 1.1140 could extend into the 1.1200s. Long-term resistance lies at 1.1350 today, and if energy prices head lower, that will be an undoubted tailwind for the single currency. As ever though, I would warn against excessive bullishness thanks to Eastern Europe. We are one headline away from EUR/USD reversing all its gains. I would also argue that ECB rate hikes will be bought forward in this environment, despite high inflation, as the Eurozone economy is fragile because of the conflict.

USD/JPY continues to retreat as US yields fall, falling 0.86% overnight to 121.85, easing to 121.75 in Asia. With Japan’s financial year-end today, the yen may well have been boosted by year-end repatriation flows. If US yields climb once again into the end of the week, USD/JPY should resume its rally, especially as the BOJ has successfully pushed 10-year JGB yields back from its 0.25% ceiling. USD/JPY has support at 121.25, which held overnight, and resistance at 123.00.

Asian currencies consolidated their recent gains overnight, with oil-sensitive currencies such as the Korean won and Thai baht booking notable gains this week. Notably, the tumble in oil prices today, and a lower US dollar overnight, have not translated into an Asian FX rally. That suggests that we have seen the best of the gains this week and that ASIAN FX is content to wait for the US Non-Farm Payrolls data tomorrow, and possibly the Biden SPR plan to be confirmed today.

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.