The US dollar index extended gains to reach a 20-month high of 97.7 this morning, putting emerging market (EM) equities and currencies under pressure of a deeper pullback.

In April, Asian emerging markets including China, Hong Kong and Singapore have entered into a consolidating phase following a strong rally in the first quarter. Markets are wobbling at recent highs but they seem to lack a catalyst for a big move ahead as fundamental metrics remain weak.

The strengthening dollar is likely to exert a negative impact on EM assets, as capital has a tendency to move out of non-dollar denominated assets in the wake of a rising dollar. On the other hand, as Asian EM currency weakens, it will help to boost their exports and speed up the recovery of those economies suffering from the cyclical downswing, and from US-China trade conflicts.

The dollar’s strength was backed by strong US corporate earnings as well as rising crude oil prices in the past few months, which may soon manifest into higher inflation readings. This came in contrast to sluggish economic indicators from the rest of the world, in particular the EU, Japan and South Korea. This Friday’s US Q1 GDP reading will be the next big catalyst for the dollar. If the reading deviates significantly from the consensus forecast of 2.1%, it may cause surging volatility in both equity and currency markets.

The Korean won has slid against the dollar and other Asian peers for a second day following unexpected contractions in its first quarter GDP from the previous quarter. A lower-than-expected supplementary budget of 6.3 trillion won seemed to be insufficient to shore up exports and the jobs market.

Aside from worse-than-expected Korean GDP readings, traders are also eyeing Bank of Japan interest rate decisions to be announced today for clues to the yen’s next movement. USD/JPY has been ranging around 111.9 for more than a week, while the dollar index has surged higher against its major peers. The central bank is widely expected to keep its policy rate unchanged at -0.1% amid a tepid economic outlook and lack of inflation, and traders will probably focus more on Governor Kuroda’s forward guidance.

AUD/USD has rebounded mildly to the 0.702 area this morning after a sharp fall following weak CPI readings yesterday. Technically, 0.700 remains a psychological and key support level, and momentum indicators RSI have signalled oversold. Breaking below a 0.700 mark could trigger mass stop-loss orders placed beneath it and cause a deeper move downwards.

EUR/USD has broken down a key support level of 1.118 and moved to a lower-low of 1.115 this morning, due to recent diverging economic fundamentals between the US and eurozone. Technically, 1.115 is an immediate support level (127.2% Fibonacci extension), breaking below which will open room for the next support at 1.105 area (161.8% Fibonacci extension).

EUR/USD chart

 

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