USD fightback leaves a mixed outlook for major forex

Major forex set for a mixed period in front of the Fed

• Markets increasingly set for another hike: FOMC hawk, Waller argues for higher rates
• USD bounce back: The USD outlook has stabilised on major forex.
• Equities have opened mildly positive: European indices are higher, with US futures also gaining.
• Metals look to regain their strength: In commodities, gold and silver are trying to recover sharp losses on Friday.

A mixed period ahead for major forex 

There has been a pause in the USD sell-off on Friday, in a move that could now herald a phase of mixed trading on major forex.

Despite weaker-than-expected US Retail Sales data, the comments of one prominent FOMC hawk put a floor under the USD. 

Christopher Waller (a permanent voter and a Board Governor on the FOMC) has suggested that the aggressive interest rates of the FOMC “haven’t made much progress” on reducing inflation.

Waller said that “monetary policy needs to be tightened further”.

An instant market reaction

Markets have quickly moved to take account of the comments by this notable hawk. 

Interest rate futures now price for an 85% probability of a hike in May (according to CME Group FedWatch).

This has impacted major markets into the new trading week:

• Yields have pulled higher – the 2-year and 10-year Treasury yields are at two-week highs.
• The USD has picked up from around the support of the February lows on the Dollar Index.
• Elsewhere, Gold and silver pulled sharply lower and US equities also pulled lower.

A choppy phase lies ahead

This is the final week before the FOMC moves into its “blackout period” ahead of the FOMC meeting on the 2nd and 3rd of May.

However, there is little US data of note that is likely to shift the market outlook.

Aside from the New York Fed Manufacturing today and a bit of housing data (housing starts, building permits and existing home sales), perhaps the only market-moving data will be the flash PMIs on Friday.

This means that unless Michelle Bowman comes out with anything outlandish on Thursday, it is likely to be a relatively quiet week.

The Fed then moves into its blackout on Saturday.

This could mean now that the USD weakness is on pause ahead of the Fed decision on 3rd May.

The performance of major currencies versus the USD reflects this. 

The outlook for AUD, NZD and JPY remains choppy, whilst it is also interesting to see EUR and GBP dragged back slightly.

A bearish key reversal on Cable

The technical analysis of GBP/USD shows that a “bearish engulfing” candlestick (bearish key one-day reversal) has tempered the rally.

This may put the breakout on pause for now.

GBP/USD

The breakout above 1.2445 has been a key move in the past couple of weeks.

However, the bearish engulfing candle has left resistance at 1.2545 and this is now a key barrier to gains.

A bearish engulfing candle is a decisive reversal signal. It leaves a key resistance in place.

• The important test will now be the support of the higher low at 1.2345. If this is broken then it would generate an increased corrective move.
• The daily RSI moving below 50 would also be corrective.

For now though, with a mild tick higher today, the outlook is mixed.

This mixed outlook could remain the case in a 200-pip range between 1.2345/1.2545.  

USD/JPY

Higher US bond yields will tend to be supportive for USD/JPY, and this is proving the case now.

USD/JPY has moved higher to a one-month high this morning.

• This move would be confirmed by a close above 134.05 
• The daily RSI is confirming the move higher too.

This continues a run of higher lows in recent months that has formed a gradual uptrend.

The support at 132.00 is taking on added importance too. 

A move above 135.10 resistance would open the key February high of 137.90.

Support and resistance levels for Forex, Commodities, and Futures/Indices 

Data: MT5/IXOne

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