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Could we be set for further US dollar losses?

US dollar notes with a red down arrow overlaid on top

Last Tuesday I posed the question as to whether we’ve possibly seen peak US dollar? Since then, the greenback has fallen over 4.5% against the Japanese yen, as well as the Swiss franc, while we’ve seen the euro retest its August peaks.

The break below the 140.00 level against the Japanese yen feels particularly significant in the wider scheme of things, as has the sharp fall in US yields across the board, which suggests the top could well be in, for this year at least.

We’re also starting to see the beginnings of a recovery in the China yuan after weeks of losses against the US dollar, as speculation continues about the prospect of some easings of Covid restrictions.

We could hear more on that and further measures from Chinese officials later this week as China’s President Xi and US President Biden get set to meet later today, ahead of this week’s G20 summit in Indonesia.

This has translated into sharp weekly key reversals in both the US 2 year and the 10-year yield, on the back of several US Federal Reserve policymakers making the case for a step down in the pace of US rate rises, in response to last week’s lower than expected CPI number.

Last week we heard from Dallas Fed President Lorie Logan, Philadelphia Fed President Patrick Harker, and San Francisco Fed President Mary Daly, who all indicated that a slower pace of rate hikes might be appropriate in the first sign that we could be starting to see a shift in the consensus amongst Fed officials.

This narrative of a slower pace was added to yesterday in comments by Fed governor Christopher Waller, saying that while inflation was still very high, and that while last week’s CPI was a single print the Fed could still start thinking in terms of going at a slower pace.

We already know from previous comments from Fed vice chair Lael Brainard a month ago, voicing concern about the prospect of policy lags, and the impacts of such lags on the US economy, that the pace of rate hikes was causing concern. She is due to speak again later today in Washington, so it will be interesting if she follows up on that theme in her comments on the economic outlook.  

She won't be alone in offering comments on the US economy, as we get a plethora of Fed speakers every day this week so the markets will have plenty to digest. 

Last week’s sentiment shift helped to create further momentum into the recent rebound we’ve seen in both European and US equity markets, which has seen the likes of the DAX post its 6th successive weekly gain, its best run since April 2021.

We also saw strong gains from US markets with the S&P500 and Nasdaq 100 closing at two-month highs.

It’s also set to be a big week for the pound as we get set for a tsunami of economic data, after last week’s Q3 GDP numbers showed that the UK economy contracted by -0.2%. Later this week we’ll be getting the Autumn Statement, which is expected to see a plethora of spending cuts and tax rises announced, which to all intents and purposes could make the outlook for the UK economy even worse.

We’ve heard a lot of narrative in recent weeks that bond markets are looking for a budget that focusses on fiscal responsibility, which is all well and good but if the government's plans end up driving the economy even further onto the rocks, one struggles to comprehend how that will help in the long run.   

EUR/USD – broke to the upside and retested the August highs at 1.0370, with the 200-day SMA the next key resistance at 1.0430. The uptrend from the September lows remains intact with support also at the 50-day SMA at 0.9900.   

GBP/USD – looks set for a move back towards the 1.1980 area after breaking above the 1.1735/40 area and September highs. This should now act as support on any dips with a break below 1.1720 retargeting the 1.1580 area.

EUR/GBP – continues to chop in the broader range. Broad support at or around the 0.8690 area and resistance at the highs last week at the 0.8830 level.

USD/JPY – the break of 140.00 last week was significant and marks the potential for further losses towards 130.00. Currently have support at 138.15, with a break below 138.00 targeting a move towards 136.00. Resistance comes in at 140.20.

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