Fed tightening fears boost US dollar

US dollar soars on Fed tightening nervousness, weak euro

The euro and yen have tumbled since Thursday, and US bond yields have noticeably firmed once again as Fed rate hike fears increase the closer we get to May’s FOMC. That has combined to punish the dollar index substantially higher, rising 0.50% to 100.33 on Thursday. The dollar index rose slightly on Friday and has gained 0.20% to 100.70 in Asia today. Resistance at 100.90 is within sight, and a move through 101.00 would signal more gains targeting the 2020 pandemic-panic highs at 103.00. Support is between 99.40 and 99.55.

The ECB policy decision, where it signalled little to no intention of increasing the pace of tightening or removing QE earlier, saw EUR/USD sold heavily on Thursday. EUR/USD traded between 1.0750 and 1.0900 before finally finishing 0.60% lower at 1.0830. The single currency eased slightly on Friday before moving 0.20% lower to 1.0785 in Asia today. The euro is now facing a serious test of the multi-decade support line at 1.0800.  A daily close will increase bearish nerves, and a weekly close below it will be a powerful bearish signal. Initial targets are 1.0600 and 1.0300 and potentially a fall through 1.0000. Rallies to 1.0950 should find plenty of sellers. Ukraine and energy fears and a dovish ECB make a sustainable rally in the euro challenging now. Only a sudden narrowing of the US/Core-Europe rate differential will likely change the outlook.

Sterling is holding above 1.3000 for now at 1.3030, as markets price in hikes by the BOE in May, and heavy EUR/GBP selling supports GBP/USD. Rallies have been limited to the 1.3150 regions, though, and the risk remains skewed towards a comprehensive failure of 1.3000, which should target 1.2700 initially. The Australian and New Zealand dollars have both suffered heavy losses over the past few sessions, as risk aversion increases, and with both central banks perceived as being too slow to move on inflation. AUD/USD had fallen to 0.7360 and has support at 0.7300. NZD/USD has broken its uptrend line at 0.6815 last week, retreating to 0.6730 today. As risks of a hard landing increase, NZD/USD remains the more vulnerable. Failure of 0.6815 now could see NZD/USD fall all the way back to 0.6500 in the weeks ahead, with 0.50% priced into the next RBNZ meeting.

The widening US/Japan yield gap has seen USD/JPY soar over the past two sessions, reaching 126.65 this morning, taking out previous resistance at 125.80, which becomes initial support, followed by 125.00. Expect the official rhetoric from Tokyo to move up a notch this week now, although any dips are probably ones to buy. USD/JPY is now entirely at the mercy of the rate differential, and unless that reverses sharply, USD/JPY should target 128.00 eventually.

Asian currencies are weaker today, following the sharp move higher by US yields on Thursday, China’s economic nerves, and higher oil prices. USD/KRW has risen 0.45% to 1233.75 today, with USD/TWD climbing 0.35% and USD/JPY rising by 0.15%. Both USD/CNY and USD/CNH are also approaching one-year trendline resistance levels at 6.3770 and 6.3950 respectively. Daily closes above would signal another leg of yuan weakness. As I have said ad nauseam previously, the slow pace of Asian monetary normalisation will present challenges to Asian FX as US rates keep moving higher. A slowing China will add to those concerns meaning we are likely to see Asia FX rates move lower over the coming quarter.

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