Pound fall strongly after yesterday’s central bank meeting and reached 1.3459
Weaker than expected April US Consumer Price Inflation data pushed the Dollar lower against its main Rivals, bar Sterling. The Australian Dollar, South African Rand and Russian Ruble soared, leading EM currencies higher. The yield on the benchmark US Ten-year bond to 2.96% from 3.0%. Sterling faltered after the Bank of England left policy unchanged but cut inflation and growth forecasts.
Outlook: Disappointment over the latest US CPI read took the wind out of the Dollar’s sail for now. Markets are questioning whether the Fed will step up the pace of rate hikes this year. Yesterday’s tepid inflation saw Fed Funds Futures markets pricing in two more rate hikes (rather than three) this year. In other data released yesterday, US Weekly Jobless Claims and the Federal Budget Balance both beat forecasts.
Trading View: The drop in the US Ten-year yield weighed on the Dollar Index (USD/DXY) which fell to 92.722 from 93.104 yesterday. Apart from the Pound, the Dollar’s fall was broad-based. The Australian Dollar outperformed the Major currencies supported by a rise in base metals and risk sentiment. Copper prices rose 1%, leading base metals higher. The Kiwi fell immediately after the RBNZ said they would keep their Official Cash rate at an all-time low for some time to come. A generally weaker US Dollar enabled New Zealand’s currency to rally 0.44% off lows.
The Euro, under pressure all week from a rising Greenback rose 0.56% it’s lows, closing at 1.1917 (1.1853 yesterday).from
In the Emerging Markets, Malaysian assets rallied in response to the shock election win of 92-year old Mahathir Mohamad. The US Dollar plunged 2.4% against the Malaysian Ringgit (USD/MYR) fell to 3.9500 from near 4.0500 late Wednesday. Asian and Emerging Market currencies soared against the Greenback. USD/RUB (Dollar/Russian Rouble) fell 2.16% to 61.65 from 63.03 while the USD/ZAR was down 2.08% to 12.300 from 12.600.
Markets are now going to cling to every piece of data for signs of the Fed’s pace of rate tightening. The Fed is still on track despite the lower inflation read. However, without yield support, it's difficult to see the Dollar sustain its upward momentum. The Dollar’s impressive rally was always in danger of getting overextended and was bound for a reversal. In the FX markets, nothing goes in a straight line forever.
The current reversal should take the Dollar lower in the short term. But it will provide better entry for a medium-term Greenback rally. The Dollar needs yield support to move higher. While Ten-year yields fell, the Two-year bond yield was unchanged at 2.53%.
Economic data and events today: Canadian Employment Change and Jobless Rate; US Preliminary University of Michigan Consumer Sentiment Index.
ECB President Mario Draghi speaks to the European University Institute on the 8th edition of the State of the Union in Florence, Italy.
The Dollar Index (USD/DXY) fell below the 93.00 strong resistance level to a low of 92.538 before rallying to 92.72. USD/DXY has immediate resistance now at 93.00 and then 93.30/40 (Thursday’s highs). Immediate support can be found at 92.50. A clean break through 92.50 could see us back to the 92.00/20 strong support area, which would be an ideal buy. For now, look to trade 92.50-93.00.
EUR/USD – had an impressive bounce off its lows at 1.1843 to close at 1.1917, up 0.56%. The yield on Germany’s Ten-Year Bund was down one basis point to 0.55%. From here expect EUR/USD to consolidate at current levels with chances of a corrective rally to 1.1980-1.2020. Immediate resistance lies at 1.1940/50 (overnight high 1.19464). The next resistance level of 1.1980-1.2020 is strong. Immediate support can be found at 1.1890 and then 1.1850. ECB President Mario Draghi speaks later today on the State of the Union in Florence, Italy. Look to trade a likely range today of 1.1890-1.1960.
GBP/USD – had another typical volatile Pound day, hitting an overnight high of 1.36714 before tumbling to close 1.3518 (1.3552 yesterday). The British Pound was the only Major currency to closer lower against the Dollar. Sterling slumped to 1.34598 overnight as markets were expecting a bullish outlook from the Bank of England with no change in policy. The BOE outcome was neutral overall and traders pounded Sterling. GBP/USD has immediate resistance at 1.3540/50 and then 1.3600. Immediate support lies at 1.3500 and then 1.3470. The weaker overall Dollar should see support for the Pound emerge. Look to trade 1.3490-1.3590 today.
AUD/USD – outperformed the Major currencies and climbed 1% to 0.7535 from 0.7462 yesterday. The Aussie fell to an overnight low of 0.7450 before bouncing to a high 0.75393. We highlighted that the Australian Dollar was the only Major currency where the speculative community was short Aussie. Naturally, a Dollar reversal would see a stronger response with the specs short. Metals were also up with Copper leading the charge. The New York-based CRB Index was up 0.4%. The rally in Asian currencies also buoyed the Aussie. AUD/USD has immediate resistance at 0.7550/60 and then 0.7600 which is key. Immediate support can be found at 0.7500 and then 0.7470. The Dollar’s corrective move could see the Aussie trade back to 0.7600/30 where it would be an ideal sell. But for today look to trade 0.7500-60. Just trade this range shag, and you’ll be fine.
USD/JPY – failed to break above 110.00, fell to an overnight low 109.32 before rallying to close at 109.42. The Dollar-Yen is most sensitive to moves in the US Ten-year yield and will continue to do so. The 100.00 level will remain formidable (overnight high traded 110.108). Immediate support lies at 109.30 (overnight low 109.316) and then 109.00. We could see further selling back to 108.60/80 where it would be an ideal medium term buy. For today look to trade a likely range of 109.10-109.70.
USD/ZAR – The rand (USD/ZAR) rallied on Thursday, flirting with the R12.30/$ level after US consumer inflation numbers came in lower than expected at only 2.1% for April. Analysts expected CPI to rise by 2.5%.
Emerging market currencies came under pressure when US President Donald Trump withdrew from the nuclear deal with Iran and reimpose sanctions on the oil-rich country.
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***Information contained in this newsletter are gathered from third parties and should not be regarded in any way as trade advice or recommendations by CM Trading. CM Trading does not recommend or advise traders or investors in their decision making but merely provides information from the market for its clients as additional information is made available as per the events occurring in the financial markets.
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