Bullish Bias Towards USD/CNH
- Weaker Chinese manufacturing data dents reopening optimism
- Rate hike odds jump higher as debt ceiling fears ease – the inflation narrative to take center stage once again
- Bullish view on USD/CNH remains but recent hot run complicates entry levels
- The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library
Weaker Chinese Data Threatens Optimism around the Reopening
China’s reopening began as the rest of the world entered a growth slowdown, due to elevated interest rates and, more recently, worsening credit conditions. Today, Chinese markets sank after the NBS Manufacturing PMI missed consensus estimates and printed lower than April’s figure. The 48.8 print represents a contraction from last month and doesn’t bode well for an economy that is heavily reliant on manufacturing and global trade.
The Hang Seng and Chinese Yuan sold off after the data was released, necessitating a reevaluation of China’s economic prospects during a global growth slowdown.
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Rate Hike Odds Pick Up as Debt Ceiling Fears Ease
Interest rate expectations for the Fed funds rate have changed drastically in a single week – supporting the dollar ahead of the 14 June FOMC meeting. In fact, just last week, another 25-basis point hike looked very much like an outside bet with just 36.4% probability according to rates markets. Now, that figure has almost doubled to 71% as market participants now anticipate the Fed will forego the opportunity to “skip” another rate hike. A higher anticipated Fed funds rate has seen markets bid up the price of the dollar after it fully retraced the prior bullish move that developed from February into March.
USD/CNH Technical Analysis: Key Levels to Consider
USD/CNH has accelerated today on the back of worse than expected Chinese fundamental data and a much improved appetite for the dollar. In fact, it continues the upward directional move of the pair that has been trending higher since finding support around 6.8375.
The pair wasted no time rising above not only the 200 SMA but also the prior zone of resistance around the psychological level that of 7.00 flat. The absence of a deep pullback suggests that momentum is on the side of the bullish bias which provides little comfort to those on the sidelines. Ideally, a pullback from current overbought levels (RSI) would suggest a better entry point considering how overheated the market has become. Resistance appears via the long term level of 7.1965 with support at 7.00 flat. From here, a reasonable pullback provides an improved risk/reward ratio.
Daily USD/CNH Chart
Source: TradingView, prepared by Richard Snow
The monthly chart helps to identify longer-term levels of interest given how quickly the pair has appreciated, taking it past recent levels of significance.
Monthly USD/CNH Chart
Source: TradingView, prepared by Richard Snow
--- Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX
