Last week the US Federal Reserve moved its growth forecasts higher and brought forward the timing of its interest rate hikes to 2023.
For a few months now the market has been expecting the Fed Reserve to start moving on inflation. So it was a surprise that the Fed’s new positive outlook for growth upset the markets sending the US Dollar sharply higher against all its Rivals on Thursday and Friday.
The US Dollar Index (USDX) which measures the value of the US currency against a basket of 6 major currencies rocketed higher by 1.3% in two days. The Euro carries the most weight in the USDX at 57.6% followed by the Japanese Yen (13.6%), the British Pound at (11.9%), the Canadian Dollar (9.1%), Swedish Krona (4.2%), and the Swiss Franc (3.6%).
A stronger US Dollar coupled with risk aversion spells danger for Emerging Market currencies and equities.
The bulk of the sell-off in the currencies against the US Dollar is due to the overextended nature of the speculative currency markets… ie, long currencies and short US Dollars. Equity and other asset markets sold off as risk aversion deepened.
The U.S. Dollar Index at 92.32 has risen 1.3% above its 90-day average, range 89.68-93.28. 7D▲+2.0% 60D▲HIGH US-Dollar index
EUR/USD – has confined itself to a range in the past month roughly between 1.2080 and 1.2220 before the Fed’s policy announcement. The European Central Bank cast no fresh clues after it left interest rates unchanged at the conclusion of its June meeting yesterday. While the ECB upgraded its growth and inflation projections there was no talk of tapering. The FOMC announcement set off a big rebound in the US Dollar and saw currencies, asset markets sold off. In the past two trading days the Euro has slid to 1.1860 from 1.2005. We will hear more from policymakers in the coming week. The sell-off in the currencies against the US Dollar may well continue. The topside of the EUR/USD is now limited to 1.2000 and the risk is for a move to the next support at 1.1700.
EUR/GBP – 0.8560 to 0.8660 has been the trading range of this cross since early May. The ECB’s June meeting came and went. While the GBP component has more scope to move this cross, and Cable’s fate came at the expense of the US Dollar. There were no big changes on this cross, but the Euro does look like losing ground to the British currency over time. Both the Euro and Sterling are vulnerable to USD strength. The UK economy is scheduled to open tomorrow (June 21).
GBP/USD – closed the week at 1.4160 (1.4210 last week). The Fed’s hawkish shift hit the Pound hard, pushing it 1.6% lower in 2 days. On Friday, Sterling closed at 13810. The next big event for Sterling is the UK’s reopening of its economy scheduled for June 21. Weaker than estimated UK GDP, Industrial and Manufacturing Production data will keep a lid on GBP/USD and GBP crosses. Until the economy reopens. An overall stronger Greenback will weigh on the Pound. GBP/USD topside 1.4000. Risks 1.3550. The Bank of England has their interest rate policy meeting next week (June 24).
AUD/USD – pretty much defined by a range between 0.7680 and 0.7780 since April. FOMC Statement and risk-off smacked the Aussie lower. On Friday, AUD/USD closed at 0.7480. The Aussie is the world’s leading risk currency and is therefore more vulnerable to further sell offs. The topside is now limited to 0.7600. Further selling could see 0.7350 tested. That said, if the market gets carried away with the downside of the Aussie, expect a rebound to 0.7560.
USD/JPY – retreated from 7-day highs around 110.30 to 109.30 this morning. The decline in the US 10-year bond yield to 1.44%, March lows pulled the Dollar lower against the Yen. Lower US bond yields will continue to cap the Dollar above 110 against the Yen. The USD/JPY rallied to close at 110.20 over the weekend buoyed by the overall stronger Greenback. However, the Yen was shielded from further Dollar strength due to its status as a haven currency during risk aversion. Further rallies in USD/JPY will be limited to 111.00. Downside support lies at 108.00.
USD/CAD – The Bank of Canada became the first major central bank to scale back asset purchases at the conclusion of its April meeting. USD/CAD was trading at 1.2610 and has since slid to a low of 1.2007 earlier this month. The USD rallied and has traded a range between 1.2120 and 1.2260 until Thursday’s FOMC hawkish shift. Friday saw a good break on the topside above 1.2320 to finish at 1.2470. A base on USD/CAD has been formed and the next move is likely toward 1.2550-1.2600.
USD/SGD – has traded between 1.3210 and 1.3310 since late May, when the USD broke lower. USD/SGD opened in Asian trade at 1.3240 on Thursday and was a touch heavy. Also picked up on USD strength, just like all USD/Asians, spiking to 1.3360 on Thursday, extending its gains to close at 1.3430 on Friday. Next resistance is at 1.3530, support now at 1.3350. Risks higher.
NZD/USD – one of the biggest losers against the Greenback. The Kiwi had its wings clipped sliding from 0.7125 on Thursday to 0.6930 at the close of trade on Friday, a loss of 3.2%. The Kiwi looks heavy but there is good support at 0.69 cents. Short term resistance can be found at 0.7050.
USD/MXN – after hitting a near 2021 low at 19.5850, the US Dollar soared against the Mexican Peso to 20.6730 on Friday. As mentioned above, a stronger US Dollar coupled with risk aversion could spell danger for Emerging Market currencies and equities. Looking like a test of resistance at 21.20 to 21.70 first up. Support comes in at 20.30, 19.90 and 19.70.
USD/THB – has traded between 31.00 and 31.50 since early March. Thursday USD/THB opened near the low end of the recent range at 31.15. On Friday, overall USD strength saw USD/THB climb to 31.45. Thailand has navigated Covid better than other Southeast Asian countries (Philippines, Indonesia, Malaysia) but the recent new wave could see many businesses struggle. Particularly the food industry. This will keep a base to this currency pair at 31.00, with the next move likely higher, through 31.50 to 32.00.
USD/PHP – also stuck within a range between 47.70 and 48.30 since late April. The Greenback has found it difficult to rally significantly against most Asian currencies as US yields stay low, while Asian yields have remained relatively firm. Friday saw a topside breakout in USD/PHP above 48.30 to 48.60. Expect this currency pair to grind higher with 49.10 in sight. Support now lies at 48.30.
EUR/AUD – has been within a range between 1.5650 and 1.5850 since mid-May. Friday saw this cross lift to 1.5770 at the close. Risk aversion weighed more on the Aussie than the Euro. We may see a topside test on this cross to 1.5900. Looking like the range shifted to 1.56-1.61.
AUD/PHP – 90-day chart has seen this cross between 36.50 and 37.80 (give or take a few points). Difficult to see any changes on this cross unless the US 10-year yield climbs back to recent highs. On Friday, the weaker Aussie saw a break lower to 36.35. Asian currencies normally take longer to react, and the USD/PHP pair should climb to 49.10. This will see AUD/PHP rally off its 36.35 base back to the 37.50/80 area.
USD/INR – The US Dollar closed around 73.25 on Thursday. The Federal Reserve’s message to the markets that it was preparing to reduce bond purchases sent most USD/Asian and Emerging Market Currencies higher. USD/INR soared to finish at 74.07 on Friday. Should Fed speak this week confirm the hawkish shift, USD/INR will likely test 74.50. Base is now at 73.80.
AUD/JPY – The souring of risk appetite almost always sees this currency pair push lower. The Australian Dollar normally strengthens when risk appetite is healthy while the opposite follows. As for the Yen, its the opposite. The Japanese currency will rise when risk appetite sours. Thus, the AUD/JPY cross nosedived a total of 1.7% in the past two days. AUD/JPY opened on Thursday at 84.60 and was last at 83.25 on late Friday.
The direction of inflation is important as that is an good indication of whether Interest Rates will rise or fall and this in turn determines Exchange Rates. You can read more about this connection in our Guide – Interest Rates and Currencies – Exploring the Relationship.
Disclaimer: Please note any provider recommendations, currency forecasts or any opinions of our authors should not be taken as a reference to buy or sell any financial product.