Note: This week, the analysis is slightly longer than usual as we discuss some significant developments on EURUSD charts and USDJPY fundamentals (so be sure to read through it).
USD Weekly Fundamental Outlook: Hawkish Fed Continues to Underpin the Dollar
The dollar strengthened modestly last week, though the DXY index mainly remains within the consolidation formation since the top on March 7. More Fed speakers (including Chair Powell) spoke hawkishly in favor of a larger 50bp rate hike, which helped to support the USD last week. However, most of the gains were heavily concentrated against the weak JPY (more on that below in the JPY section), while the dollar still finished weaker versus the commodity-linked currencies of AUD, NZD, and CAD.
The US economic calendar is jam-packed this week, perhaps promising volatile action in the Fx market. The key reports to watch are PCE inflation on Thursday and NFP/jobs on Friday. Inflation and employment are the two main factors affecting Fed policy currently and, therefore, the US dollar. With y/y headline inflation already running near 8%, the focus of Fed officials is clearly on inflation. Hence, if PCE inflation surprises to the upside again, it could prompt more hawkish rhetoric from Fed speakers (this week NY Fed President Williams will speak on three occasions).
On balance, the hawkish Fed, combined with the well-performing US economy in contrast to peers (mainly Europe), should continue to support the US dollar. In particular, Friday’s Nonfarm Payrolls report could act as a catalyst for steeper USD gains if, e.g., it beats estimates (of around 480K) and we get an overall healthy employment report (i.e., strong wage growth and lower unemployment). Other data on the calendar worth watching this week are CB consumer confidence (Tue), Chicago PMI (Thur), and ISM Manufacturing PMI (Fri).
EUR Weekly Fundamental Outlook: Euro to Stay Under Pressure as ECB Can’t Be as Hawkish as Others
Much as we anticipated in the weekly Fx last Monday, the euro reverted lower and gave up the gains from the week before. Still, the single currency remains quite resilient, given the negative shocks it faces from the war in Ukraine.
The first reason for the euro holding up well seems to be the hopes that a peace deal between Ukraine and Russia can be reached in the foreseeable future. While this may happen, it’s less likely that sanctions on Russia will be lifted simultaneously (thus, the negative impact on EUR remains).
The second reason for the EUR’s resilience recently is the ECB’s shift away from the ultra-dovish stance in the face of rising inflation. The next Eurozone inflation report will be released this Friday. Both the headline and core CPI are expected to climb (to 6.7% and 3.1%) from last month’s readings of 5.9% and 2.7%. Hence, it’s no wonder that ECB officials are growing more uncomfortable and are not denying market speculation for ECB rate hikes toward year-end.
However, the war in Ukraine and the EU economic severing ties with Russia via sanctions still mean the outlook for the Eurozone economy is much grimmer than before the war. This crisis will harm Eurozone GDP to a much greater degree than other countries that are not as closely linked with Russia. Lower growth also means that the ECB (despite them trying to sound hawkish) cannot be as hawkish as other central banks whose economies are less impacted. Such central bank policy divergence in principle should lead to a weaker currency (EUR in this case).
Still, it may take some time for the markets to have a full grasp of the implications of the sanctions on Russia and the war in Ukraine and for this to be reflected in the Fx market. So, although the EUR outlook for the coming weeks remains bearish, the currency can continue to consolidate for a while longer or simply take a gradual trajectory lower instead of a sharper leg.
EURUSD Technical Analysis:
Perhaps the technicals best highlight the significant crossroad that the EURUSD pair has reached. As we discussed here on the monthly chart, EURUSD is testing a significant 20-year + support trendline. It is also testing the trendline that it broke in summer 2020, from the other side.
We turn back to the actual weekly timeframe for this edition of the weekly Fx analysis. Here, the most important event is the appearance of a bullish harmonic bat pattern (see chart below). As you may already know, harmonic patterns are known to either work beautifully or fail miserably.
In the case of EURUSD below, the bat pattern is currently in progress. It has bounced off the harmonic support zone but has not progressed higher toward its 38.2% Fib retracement yet (at 1.1380). Reaching this level is a minimum requirement for the pattern to be deemed successful.
So, if the bat pattern is successful, it means EURUSD will most likely push through the first key resistance at 1.1150 – 1.12. This would be a technical bullish signal and would imply that the major monthly support (1.05 – 1.10 area) is holding.
On the other hand, if the bat pattern fails miserably (i.e., EURUSD breaks the most recent swing low at 1.08), then the odds will significantly increase for the 1.05 – 1.10 monthly support to break too.
So, it seems the technical picture at this juncture can help us to get a much clearer perspective of what’s going on with EURUSD. In the end, this bat pattern may show us the way. One of the two scenarios below appear as a likely outcome of this harmonic bat pattern:
· if EURUSD breaks above 1.1150 - 1.12, then it will likely also reach the 38.2% Fib target of the bat pattern at 1.1380
· If, however, EURUSD breaks below 1.08 (harmonic pattern fails), then buckle up for a potentially fast decline to parity (1.00).
GBP Weekly Fundamental Outlook: Sterling Vulnerable to Further Losses as UK Economy Faces Hard Days Ahead
GBP performance continues to be correlated with movements in the euro since the start of the war in Ukraine. Both currencies are generally moving in the same direction versus the rest of the Fx market, while EURGBP has been trading in a 200-pip wide range since February 24.
The correlation between EUR and GBP is also justified by fundamentals as both economies are set to be hit hard by higher energy prices. The Bank of England also flagged the negative risks for the economy during their latest meeting, despite them raising rates by 0.25%. Indeed, UK consumers face a huge price shock as electricity and gas bills will rise sharply on April 1, while mortgage rates are also rising due to the inflationary environment and BOE rate hikes.
The pound is likely to remain vulnerable to further losses going forward, especially against the currently “strong” currencies like the USD, CAD, AUD. The GBP economic calendar is quiet this week, with only 2nd tier data scheduled for release. This means that GBP will continue to be driven by global factors and developments elsewhere, hence why we emphasize the correlation with the euro.
GBPUSD Technical Analysis:
Cable is so far progressing in line with a bearish scenario. It broke through the 1.3150 – 1.33 support area earlier this month, came back to retest it from the other side last week (see chart below), and is now moving down again.
All signs point to a retest of at least the previous low at 1.30. But as we’ve discussed on previous occasions here, the bearish break of the 1.3150 – 1.33 support implies a further decline below 1.30. The first support below 1.30 is 1.2850, with the more important 1.25 area coming next.
To the upside, we now have a clear swing high of 1.33 (last week) that can serve as a stop loss for short positions (see our short trade here). If GBPUSD is going to extend the downtrend below 1.30 soon, this 1.33 high should hold.
JPY Weekly Fundamental Outlook: Yen in Free Fall as BOJ Is a Lone Dove; Watch Out for March 31 Fiscal Year End
The only currency that has not seen more “consolidative” action this month is the JPY. Instead, it’s a one-way street here, with JPY pairs climbing steadily higher due to the yen free-falling like a rock. USDJPY even poked above the 125.00 level today while other pairs that are more reflective of the commodity divergence – like AUDJPY – are up 1000 pips this month (AUD benefits while JPY suffers from higher commodity prices).
JPY pairs spiked higher overnight and then throughout the European morning as it was reported that the BOJ was active buying bonds (QE) in order to keep the 10-year JGB yield below the 0.25% cap as set by their yield curve control policy (YCC). This is uber-dovishness from the BOJ. At this point, the Bank of Japan is a lone dove among hawkish central banks in a global inflationary environment. Hence, the unattractiveness to hold JPY.
The negative “perfect storm” of high commodity prices, uber-dovish BOJ, and a still stable risk environment (stocks holding up well) should keep the JPY weak. With that being said, however, this trend has now traveled a large distance and looks overdue for a correction.
Moreover, traders here need to keep in mind that March 31 (Thur) marks the end of the Japanese fiscal year and the end of Q1. This is an important point in the year from a flows perspective, as money managers rebalance portfolios and make large capital allocations at the end of March. This date has often proven a critical inflection point for JPY pairs. The question now is, will it be the same this time?
While the end of the Japanese fiscal year certainly won’t reverse the currently strongly bearish factors for JPY, it could be a trigger for a much-needed retracement at this point. So, this is just a potential risk to keep an eye on this week and also next week as we enter April.
USDJPY Technical Analysis:
USDJPY has gone totally off the charts as a result of yen weakness. The price action has completely pushed through the upper end of the bull channel that USDJPY was trading inside since January 2021.
Today’s session was already a rollercoaster ride of around 300 pips, with USDJPY touching 125.00 and then retracing more than half of the gains. The pair is currently up 130 pips on the day, and the close tonight will be important to note. If the candle closes near the lows around 122.00, it could prove an ominous sign.
The spike in volatility can make trading USDJPY harder, as today’s 300 pips move can easily be repeated (likely in the opposite direction). Aside from the 2015 highs in the 125.00 area, there are no significant technical zones nearby. To the downside, the first key support zone is 120.00.