The USD positive trend has dominated the outlook for major forex pairs throughout 2022. This move shows little sign of ending any time soon and we continue to see counter-trend moves as a chance to buy the USD once more. With the latest rebound on pairs such as EUR/USD, GBP/USD and AUD/USD we are getting ready for another opportunity.
- US Treasury yields are continuing to trend higher and are supportive of the USD.
- Fed speakers remain hawkish
- Prevailing trends on major forex pairs point to ongoing USD strength.
Higher US yields support a stronger USD
The continued move higher in US Treasury yields, especially in the past few months has been a key factor in supporting ongoing USD strength. This has come at a time when inflation expectations have not been rising as fast.
This means that “real” bond yields (bond yields minus inflation) continue to remain positive and are moving higher. Higher real yields help to support the USD.
We can see that the correlation between real yields and the USD remains strongly positive (even if it has dipped back in the past few sessions).
It is interesting that as US bond yields have consolidated in recent days, this has coincided with an improvement in risk appetite and a slip back of the USD. However, this morning, we are seeing that US Treasury yields are moving higher again. The US 10-year yield has been hovering around 4% in recent sessions but is now looking to move decisively above it. This is helping to support the USD once more.
Hawkish Fed speakers continue to support USD
Markets have been focused more on the turmoil in UK politics recently. However, as this has begun to subside, the focus is turning back to the outlook of the Federal Reserve and rising US bond yields once more.
As such, we continue to watch the speeches from FOMC members with intent. They remain hawkish and tend to suggest that even higher Fed rates could be seen.
Neel Kashkari used to be the most dovish FOMC member. However, he is now advocating the prospect of rates being around 4.5% in 2023 and could be higher beyond that if core inflation does not show signs of falling.
US Fed Funds Futures (i.e. US interest rate futures) suggest a terminal rate is close to 5% in mid-2023. The US 2-year yield is currently 4.48%, suggesting that US Treasury yields could have further to run on the upside. This would help to fuel further USD gains.
Technicals show USD strength is ready to resume
Looking at the charts of USD pairs on major forex, we see that the recent moves are likely to be an opportunity to play for USD strength once more.
On EUR/USD there has been a rebound into resistance between 0.9800/0.9900 resistance. The daily RSI has continued to fail around the 50 mark and the falling 55-day moving average (currently 0.9949) is an excellent basis for resistance. We believe that this recent tick higher is a chance to sell for a retest of 0.9630 and the low at 0.9535. It would need a decisive break above parity to abort this move.
GBP/USD is in a similar position (although there is added volatility from the UK political turmoil). Ultimately though, the outlook for the UK economy looks negative and this will be reflected in the outlook on Cable. We see the rebound into the resistance between 1.1380/1.1490 as a chance to sell. This resistance has limited moves over the past week and the technicals are suggesting that the rebound is losing its recovery momentum. A decisive move below 1.1255 shows deterioration with below 1.1150 opening at least a test of 1.0925.
The AUD/USD is another chart where a technical rally is running dry. The old support of the September low has left a band of resistance between 0.6345/0.6390. This coincides with the resistance of a six-week downtrend channel. Furthermore, the daily RSI has unwound towards 40/45 where rallies within the channel have consistently faltered. This looks to be a chance to sell for a retest of the 0.6170 low and below.
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