The currency market is seeing notable changes, with the US dollar facing pressure as traders anticipate a more relaxed stance from the Federal Reserve. As the dollar dips, currencies like the euro, yen, and sterling are showing strength, while commodity currencies stay steady despite challenges in China.
The value of the dollar against a basket of major currencies is weakening, as market participants anticipate the start of an easing cycle by the US Federal Reserve.
The US dollar index (DXY) chart continues to trend downwards, nearing a yearly low at 100.30. After briefly falling below the 100.51 support level, the dollar has shown limited resilience, with bearish momentum dominating the market.
The 5, 10, and 30-period moving averages are positioned in a bearish alignment, with prices consistently trading beneath all of them. This indicates persistent selling pressure and a strong downward trend. The MACD histogram remains in negative territory, while the signal line is moving below the zero line, reinforcing that bearish momentum is still strong. Although the histogram is showing signs of moderation, suggesting a potential slowing of the selling pressure, there is no clear indication of a reversal.
We believe the recent decline reflects market expectations of a more dovish Federal Reserve. Fed funds futures indicate a 67% probability of a 50 basis point rate cut, fuelling a bearish outlook for the dollar. Immediate support lies around the 100.30 level. Should this support fail, the next major support level could be around 100.00. On the upside, any retracement is likely to face resistance near the 100.75-101.00 region, where the moving averages converge.
With bearish technical indicators and a dovish outlook for the Federal Reserve, the dollar may remain under pressure. A breach below 100.30 could pave the way for further declines, while any potential bounce is likely to encounter significant resistance around the 100.75 mark.
During the early Asian session, the euro (EUR/USD) traded around USD 1.1123, inching closer to its 2024 high of USD 1.1201. The anticipated dovish stance of the Federal Reserve is seen as providing support to the euro, especially if the rate cut exceeds expectations. Should the euro break above USD 1.1201, it may test new resistance levels.
Forecasts suggest that if the Federal Reserve opts for a larger-than-expected cut, it could maintain downward pressure on the dollar, offering a short-term boost to the euro. However, stronger-than-expected US retail sales data may limit the euro’s potential gains.
The yen (USD/JPY) briefly crossed the 140 mark on Monday during this holiday trading before easing back to 140.77 in Tokyo. As the weakest among the major currencies this year, it has room for a rally should the US adopt a more dovish policy.
Traders are closely monitoring for a sustained break below 140, which could open the door to a deeper decline towards the January low of 127.215. A dovish message from the Federal Reserve would contrast sharply with the Bank of Japan, which is expected to maintain its steady policy on Friday. However, the Bank of Japan could hint at future rate hikes, potentially leading to increased volatility for the yen in the coming weeks.
Sterling (GBP/USD) has been the best-performing currency in the G10 group this year, rising 3.9% against the dollar. It traded at USD 1.3203 in the Asian session after breaking through the USD 1.32 level on Monday. The strength of the pound appears to be driven by forecasts of positive economic data in Britain and persistently high inflation.
While the Bank of England is largely expected to hold rates steady at 5% during its Thursday meeting, there is a 36% chance of another rate cut being priced into the markets. Should inflation remain high, the Bank of England could lean towards further tightening later this year, potentially driving sterling even higher against the dollar.
The Australian (AUD/USD) and New Zealand (NZD/USD) dollars rallied early in the week, trading at USD 0.6746 and USD 0.6189, respectively, on Tuesday. Traders seem to be focusing on the Federal Reserve’s potential dovish pivot rather than weak economic signals from China. These currencies have remained resilient despite concerns about slowing growth in the region.
China’s markets are closed for the Mid-Autumn Festival, but offshore trading of the yuan (USD/CNH) remained stable at 7.0947. Analysts expect the yuan to stay within this range unless new data from China signals a faster economic recovery.
All attention is on the upcoming US retail sales figures, which could provide insights into consumer spending trends. A surprise increase could support the dollar and ease some of the pressure for aggressive rate cuts.
Additionally, Canada’s CPI data, due later in the session, may offer clues about inflation trends north of the border, potentially impacting the performance of the Canadian dollar. While markets are firmly focused on the Federal Reserve’s decision, any divergence in US retail sales data or Canadian inflation trends could quickly shift expectations and spark market volatility in the coming days.
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