US dollar soars versus euro and sterling

US dollar rises on strong data, Fed expectations

The dollar index leapt higher overnight, thanks in part to the heavy weighting of the euro and yen in it, which slumped against the greenback. Robust US data and an ensuing extinguishing of hopes that the Fed would need to ease hiking expectations were behind the US dollar rally. The soggy data from Europe and the UK this week, in contrast to US releases, reinforcing greenback strength.

The dollar index soared 0.75% to 102.54, rising above the long-term triangle line once again, today at 102.35. In Asia prices have remained steady, the index edging up to 102.57. The 100-point move higher has left support distant at 101.75, while the close above 102.50 suggests the index could retest 103.00, especially if US yields rise again today, putting more downward pressure on the yen, which also has a large index weighting.

EUR/USD fell by 0.75% overnight, with US data leaving Fed hiking expectations on track, while soft GDP data from the Eurozone this week continues to darken its outlook. EUR/USD fell 70 pips to 1.0652, where it remains in Asia. The 1.0800 to 1.0830 region ahead of the multi-decade breakout line looks like an insurmountable barrier for now. Risks are now skewed towards a retest of 1.0600, although if OPEC opens the pumps, the single currency could receive a boost.

GBP/USD is in the same boat as the euro and fell by 0.93% to 1.2485 overnight, closing below support at 1.2500 which become immediate resistance. The series of daily highs just below 1.2670 has become a formidable barrier now, particularly with the challenging economic environment in the UK staying the BOE’s rate-hike hand. Risks have shifted towards a test of 1.2400. Liquidity will be severely reduced today and tomorrow with UK holidays, meaning sterling volatility could track higher.

USD/JPY rallied 1.13% higher to 130.13 after US data put the Fed hiking path back on track and US bond yields firmed. With the Bank of Japan and government officials still vehemently sticking to a no rate hike outlook, the US/Japan rate differential and outlook spurred a powerful rally by USD/JPY. The USD/JPY correction looks over for now unless US yields suddenly move lower. Resistance at 130.00 broke overnight and becomes nearby support, followed by 129.00. Resistance lies just above 131.00.

AUD/USD failed ahead of the 0.7250 zone overnight, which contains its 50, 100 and 200-day moving averages (DMA). As US data hit the wires, AUD/USD retreated to finish almost unchanged at 0.7175. A souring of sentiment could see AUD/USD testing support at 0.7150, opening a potentially deeper correction. ​ Having traced out a series of tops at 0.6560, NZD/USD continued to underperform overnight as sharp economic slowdown fears increase. NZD/USD fell 0.50% to 0.6480 where it remains this morning. Failure of 0.6400 signals an outright reversal and a return to the low 0.6200s.

While currency markets in the DM space remain barely changed in Asia, traders are content to wait and see, there is pronounced weakness in the Asia FX space today. Asian currencies retreated overnight as the Fed’s hike path was confirmed by US data releases, and that has continued in Asia. USD/KRW has risen 0.45%, USD/TWD is up 0.80%, while USD/CNY, USD/SGD, USD/THB, and USD/SGD are all around 0.20% higher.

I believe most of the sharp reversals seen overnight and today are due to the amount of risk-seeking hot money that has piled into EM recently, running for the door. The fall of the euro, AUD and NZD also suggests the same. As such, I do not believe we are at the start of another major move lower by Asia FX yet. That likely requires US 10-year yields to creep above 3.0% again, although gains will be limited as well. Asian FX should also get an OPEC+ boost today if the grouping side-lines Russia and opens the taps.

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