The US dollar rally continues

Dollar gains ground on FOMC aftershock

The US dollar recorded another impressive rally overnight. The dollar index rose through its 200-DMA at 91.50 on its way to a close at 91.90, a 0.55% gain for the day. Although the short-term technical indicators say the index is moving near to overbought territory, any dips to 91.50 should find support now as the close above the 200-DMA is significant. Resistance is nearby at 92.00, followed by 92.50. A less-dovish FOMC, foreign inflows into the US bond market, and a speculative market that was well short of US dollars into the FOMC, should see the US dollar rally continue into next week.

A firm US dollar has left a number of the major currencies at a critical juncture technically, with the potential for more losses ahead, compounded in some cases, by the fall in commodity prices. EUR/USD fell through support at 1.2000, and its 200-DMA at 1.1993 overnight, finishing 0.73% lower at 1.1910. With the ECB showing no sign of using the taper word, the implicit divergence between it and the Fed will continue to weigh on the single currency. The 1.2000 region is a formidable barrier to any recovery, and its correction lower has the potential to extend to 1.1700 in the days ahead.

GBP/USD remained under critical support at 1.4000 overnight, falling 0.44% to 1.3925, taking out its 100-DMA at 1.3940. Rising delta-variant Covid-19 cases are causing some nerves in UK markets, and GBP/USD will find rallying through 1.3940 and 1.4000 challenging now. The overnight low at 1.3895 forms initial support, but GBP/USD can retrace to the 1.3700 regions now.

AUD/USD and NZD/USD also suffered overnight, both promptly reversing data-driven gains with heightened risk sentiment and falling commodity prices, sending them sharply lower once again. AUD/USD fell 0.77% to 0.7545, its 200-DMA, where it remains this morning. Failure of 0.7600 implies further losses to the 0.7400 area. NZD/USD fell by 0.62% through its 200-DMA at 0.7038 to 0.7010 overnight. That now becomes resistance and failure of support at 0.7000 and 0.6950 could see kiwi retreat to 0.6700 regions.

The PBOC set a weaker yuan fixing at 6.4361 versus the US dollar today, weaker than market expectations at 6.4330. USD/CNY is trading well higher at 6.4455 today and USD/CNH at 6.4525. That will keep USD/Asia bid and regional currencies on the back foot. The Indonesian rupiah and Indian rupee were notable losers yesterday. The pressure is likely to remain on them and Asia FX as a whole next week, especially those countries which have been cyclical recovery plays, namely ASEAN.

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