The dollar was on the defensive near nine-week lows on Thursday as a decidedly dovish outlook from the U.S. Federal Reserve gave a green light for the global reflation trade.
The setback allowed the euro to crack major trendline resistance at $1.2114 and power up to the highest since late February at $1.2135. The break opened the way to bull targets at $1.2196 and $1.2242.
Fed Chair Jerome Powell quashed speculation about an early tapering of asset buying, saying it was “not time yet” to begin talking of it, and employment was still a long way short of where it needed to be.
“The risk is the Fed is very cautious and delays taking the first steps to normalising policy,” said Joseph Capurso, head of international economics at CBA. “Low interest rates amid an improving U.S. and global economy is a recipe for the dollar to continue decreasing.”
Even the outperformance of the U.S. economy had a sting in the tail for the dollar as it sucked in imports and drove the trade deficit to record highs in March.
“That surge implies the U.S. current account deficit was around 4% of GDP in Q1, a significant weight on the USD in the medium term,” said Capurso.
It could also temper any reaction to an upbeat U.S. GDP report due later on Thursday, where market forecasts are for annualized growth of a whopping 6.1%.
The closely-watched Atlanta Fed’s “GDP Now” estimate is that GDP expanded by 7.9%, suggesting considerable upside risk.
The Fed’s dogged dovishness was a marked contrast to the Bank of Canada which has already begun to taper its asset buying, sending the dollar sliding to a three-year trough on the loonie at C$1.2303.
Another notable break lower came against the Norwegian crown, where the dollar hit its lowest since October 2018 at 8.1645 crowns.
The crown has been carried higher by rising oil prices as the global economic recovery boosts demand for commodities, a trend that is also benefiting the Australian <AUD=D3> and New Zealand dollars.
The dollar also shed much of the week’s gain on the yen, falling back to 108.45 from Wednesday’s top of 109.07. A holiday in Japan could keep it contained in Asian hours.
Against a basket of currencies, the dollar was down at a near nine-week low of 90.554, and a long way from the rally peak of 93.439 hit at the end of March.
The current upside momentum could push USD/JPY to the 109.30 region in the next weeks, commented FX Strategists at UOB Group.
24-hour view: “We highlighted yesterday that ‘momentum remains strong and USD could strengthen further to 109.10’. We added, ‘overbought conditions suggest that the next resistance at 109.30 is likely out of reach’. USD subsequently rose to 109.07 but pulled back sharply during NY hours. The decline has scope to extend but any weakness is likely limited to a test 108.20. Resistance is at 108.65 followed by 108.90.”
Next 1-3 weeks: “Yesterday (28 Apr, spot at 108.80), we highlighted that USD ‘is expected to trade with an upward bias towards 109.30’. USD subsequently rose to 109.07 but fell sharply during NY hours. Upward momentum has been dented but only a break of 108.00 (no chance in ‘strong support’ level) would indicate USD is not ready to move towards 109.30.”
Cable remains firm and could attempt a move to 1.4010 in the next weeks, suggested FX Strategists at UOB Group.
24-hour view: “We expected GBP to ‘trade sideways within a 1.3860/1.3920 range yesterday’. GBP subsequently drifted to a low of 1.3863 but during NY session, it rallied sharply to 1.3951. Rapid improvement in momentum is expected to lead to further GBP strength. That said, the rapid rise appears to be running ahead of it itself and major resistance at 1.4010 is unlikely to come into the picture (there is another resistance at 1.3980). Support is at 1.3925 followed by 1.3900.”
Next 1-3 weeks: “We have expected GBP to ‘trade between 1.3750 and 1.3950’ since last Friday (23 Apr, spot at 1.3845). In our latest narrative from Tuesday (26 Apr, spot at 1.3880), we highlighted that ‘looking ahead, a break of 1.3950 would not be surprising but GBP has to close above 1.3980 before a sustained advance can be expected’. GBP surged during NY session and while it did not close above 1.3980, the sharp and rapid advance has resulted in a vastly improved momentum. From here, GBP is expected to trade with an upward bias towards 1.4010. At this stage, the prospect for a sustained rise above this major resistance is not high. On the downside, a break of 1.3850 (‘strong support’ level) would indicate that GBP is not ready to move higher.”
Gold prices rebounded from session lows and close up on the session as the dollar dropped in the wake of the Fed decision. U.S. Treasury yields eased after rallying on Tuesday. The Fed is expected to keep interest rates on hold for the foreseeable future, despite higher inflation expectations and stronger growth.
Gold prices rebounded on Wednesday, bouncing off the lows and closing above support. The upward trend remains in place with resistance seen near the Fibonacci retracement level of 38.2%, which is seen near 1,828. Target resistance on the yellow metal is seen near the February highs at 1,855. Support is seen near the 10-day moving average at 1,778. The 10-day moving average has crossed above the 50-day moving average which means that a short-term uptrend is now in place. Short-term momentum is negative but consolidating as the fast stochastic started to consolidate. The current reading on the fast stochastic is 76. Medium-term momentum has turned positive as the MACD (moving average convergence divergence) index generated a crossover buy signal. The MACD histogram is printing in positive territory with a declining trajectory which points to consolidation.
Legal disclaimer: The material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instruments. UR Trade Fix Ltd accepts no responsibility for any use that may be made of these comments and for any consequences resulting in it. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk. The analysis does not involve any specific investment objectives, financial situation and needs of any specific person who may receive it. Past performance does not constitute a reliable indicator of future results and future forecasts do not constitute a reliable indicator of future performance.
It has not been prepared in accordance with legal requirements designed to promote the independence of research, and as such it is considered to be marketing communication. Although we are not specifically constrained from dealing ahead of the publication of our research, we do not seek to take advantage of it before we provide it to our clients. We aim to establish, maintain and operate effective organizational and administrative arrangements with a view to taking all reasonable steps to prevent conflicts of interest from constituting or giving rise to a material risk of damage to the interests of our clients. We operate a policy of independence, which requires our employees to act in our clients’ best interests when providing our services