US dollar under pressure

US dollar is vulnerable to a deeper downside correction

The US dollar continues moving lower overnight, despite longer-dated US yields firming once again, a sign that short-term upward momentum is fading. The dollar index fell by 0.35% to 95.96, climbing modestly in Asia to 96.03. The fall overnight was led by gains in EUR/USD, which rose 0.65% to 1.1330, another warning sign that US dollar momentum is fading as crowded positions are trimmed into tomorrow’s US CPI release. A 7.0% print is looking priced in now, and the index could trade as low as 95.50 on an on-expectation print.

EUR/USD is steady at 1.1330 today and could retest the top of its range at 1.1375 into the US CPI. The single currency is likely to struggle at that level though, as European equities show signs of virus nerves. Sterling sank to 1.3205 overnight after the government reinstated work-from-home guidance. Given the caseloads in major Eurozone countries now, it is hard to see the euro avoiding the same fate.

USD/JPY rose slightly with US yields to 113.70 overnight and seems to be back to its interest rate differential business-as-usual best. AUD/USD rode sentiment 0.75% higher to 0.7165, and I don’t discount further gains to 0.7250+ into the US CPI data. NZD/USD has risen much more sedately, trading at 0.6810 today, and continues to be weighed down by inflationary pressures and a central bank sitting like a possum in the headlights.

Asian currencies mostly recorded decent gains overnight on recovering sentiment. That has continued this morning with CNH, MYR, SGD, THB, TWD, and IDR all rising versus the US dollar. Only the Indian rupee has remained unchanged, after the Reserve Bank of India policy meeting yesterday. The RBI quashed any rate hike expectations and reinforced that it remains focused on supporting India’s post-delta recovery.

The price action in US bonds and by the US dollar suggests that the Fed taper trade has become a little crowded, helped along by omicron fears receding rapidly. It will probably take a print well north of 7.0% to jar nerves into the end of the week and I can see the US dollar retreat continuing in the week’s end. But the sentiment remains fragile, and I would caution about picking the top of the US dollar with complacency into the FOMC meeting appearing to be rising.

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