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US Dollar Price Action: USD/JPY, EUR/USD, GBP/USD

US Dollar Price Action: USD/JPY, EUR/USD, GBP/USD

Justin McQueen, Strategist

USD, USD/JPY, EUR/USD, GBP/USD Analysis and Talking Points

  • USD weighed by continued JPY short-covering
  • Fed dove pushes back on dovish market reaction

The US Dollar continues to falter as yields edge lower, while an extension of the current short-covering in the Japanese Yen also weighs on the greenback. Over the weekend, the Fed’s Kashkari pushed back on the notion that the central bank could soon be hitting the pause button, stating that the bank is a long way away from its inflation goal. This is noteworthy from Fed’s Kashkari which is typically seen as an uber-dove and thus the market may have gotten ahead of itself following last week’s rate decision.

EUR: As such, when looking at EUR/USD, key technical hurdles have yet to be tested with the pair holding below the ECB spike high at 1.0280 and prior support, now resistance at 1.0340-60. For me to see this recovery as more than a correction, we would have to see a close above the 55dma at 1.0430. Until then, the path of least resistance remains to the downside.

EUR/USD Chart: Daily Time Frame

US Dollar Price Action: USD/JPY, EUR/USD, GBP/USD

Source: Refinitiv

JPY: With USD/JPY testing the 132.00 handle, support is situated at 131.48 (June 16th low) through to the April/May highs at 131.25-35. On the topside, resistance resides at 134.34. Looking ahead, the focus will be on the upcoming ISM Manufacturing PMI and after the surprise contraction in the US Markit PMI, the focus will be on whether ISM also contracts. Should we see a move to contraction, the cleanest expression of lower USD would be via USD/JPY. That being said, it is worth noting that in the recent PMIs, the manufacturing sector had held firm relative to services and thus a higher than expected print could see USD/JPY back above 133.00.

USD/JPY Chart: Daily Time Frame

US Dollar Price Action: USD/JPY, EUR/USD, GBP/USD

Source: Refinitv

GBP:Bank of England this week. Question is, will they stick to 25bps or move to 50bps?

Economists polled are near 50/50 on this with BBG consensus for 50bps,Reuters consensus is 25bps. Meanwhile, market pricing (and FinTwit) is more certain that the BoE will hike 50bps, currently a 78.3% probability.

US Dollar Price Action: USD/JPY, EUR/USD, GBP/USD

Source: Twitter

Looking back at past decisions, the BoE has ultimately been a hawkish disappointment relative to market expectations, hence the Pound has generally moved lower in reaction.

To me, I think we see another hawkish disappointment, EVEN IF the BoE hikes 50bps, which I lean towards. Firstly, we have seen aggressive hikes from most G10 central banks, including RBA, RBNZ, BoC, ECB and the Fed. With the exception of the Fed, gains in the currency on the back of an aggressive hike have not been sustained.

Alongside this, aside from an expected knee-jerk move higher in GBP from a 50bps hike, follow-through will depend on the accompanying statement, which the BoE have often been much more cautious on the growth outlook than its counterparts. Downside risks have grown domestically and globally since the June meeting.

As such, I would expect a 50bps hike with a dovish/cautious statement, resulting in initial gains being faded, particularly with the fact that markets remain far too aggressive on BoE policy going forward (market projects terminal rate at 2.7%, BoE saw the terminal rate at 2.5% in last MPR). What's more, there is also the vote split, I can't imagine that being a 9-0 vote for 50bps, would expect the likes of Cunliffe and Tenreyro to opt for 25bps.

US Dollar Price Action: USD/JPY, EUR/USD, GBP/USD

Source: DailyFX, Bloomberg

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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