US Dollar Weekly Forecast: Neutral
The US Dollar: There is Life Yet
The dollar has come off a week where there has been a notable bid towards the end of the week, spurred on by that higher than anticipated Producer Price Index (PPI) print on Thursday which held up on Friday to a large degree.
In the week to come, the FOMC meeting and US flash PMI numbers for March will be the key dollar-focused event risk, but in truth there is a lot of ‘high importance’ data/events that can impact some dollar-linked assets. Major central banks from Australia, the UK, and Japan will join the Fed in providing updates to their respective monetary policy and, while only the Bank of Japan shows a realistic chance of movement on interest rates, statements from the other central banks may offer clues into their thinking ahead of the summer when there is a strong expectation we will see rate cuts.
February inflation data for the UK and Japan can feed into GBP/USD and USD/JPY pairs next week. Sticking with the dollar though, an interesting development has unfolded during this last week where shorter-dated US Treasury yields have risen consistently but the dollar has lagged behind in this regard, only partially catching up after PPI proved to be a catalyst. Therefore, heading into the new week there could be an attempt to move higher in DXY ahead of the FOMC meeting, perhaps testing the 200-day simple moving average (SMA) (red line).
US Dollar Basket (DXY) Daily Chart
Source: TradingView, prepared by Richard Snow
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ECB Officials Stay True to Their Biases and the Euro Loses Ground
This week it seems all the ECB officials were out in full force, providing their opinions on when it may be appropriate for the central bank to start cutting the benchmark interest rate. On Thursday, the well-known dove Yannis Stournaras was the most eager to see rate cuts precede any movement from the Fed, calling for two rate cuts before the summer break.
In contrast, the well-known hawk Klaas Knot mentioned June as the most likely meeting with another two cuts favoured in September and December but also opened the door to cuts before June if the data justifies the need for one. Closer to the center of the spectrum, Villeroy and Wunsch communicated a cautious approach ought to be adopted and the governing council needs to be vigilant on inflation but ‘victory is within sight’ – Villeroy.
EUR/USD – which makes up the majority of the US dollar basket – was sent lower after testing the zone of resistance that emerged between 1.0960 and 1.0942. The RSI flirted with overbought territory as EUR/USD revealed a slowdown in bullish momentum and ultimately, gave way after the US PPI surprise.
The pair now sees a test of the 50 and 200 SMA as the next level of support, around the 1.0831 level. Further bearish momentum brings the 38.2% Fibonacci retracement (corresponding with the 2023 decline) level into view. Next week, flash PMI data for March will provide greater insight into whether the growth story in Germany and Europe as a whole can find some sort of foothold but the outlook has been weak for some time now.
EUR/USD Daily Chart
Source: TradingView, prepared by Richard Snow
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UK Inflation and BoE Policy Update May Have Opposing Effects
The Bank of England (BoE) made a bold projection that inflation would reach the 2% target by mid-year, instead of by the end of 2025 which suggests CPI figures will plummet in the coming months. Indeed, forecasts for core and headline inflation are expected to drop notably compared to the respective readings in February of 2023 which may weigh on sterling.
Conversely, if the BoE maintain their stance that the UK bank rate is not due to come down in the first half of the year, this could add to sterling’s appeal when you consider the Fed may eye June as the starting point for the rate cutting cycle. The two opposing outcomes will depend on the actual data but could amount to a rather choppy week in the absence of major influences driven by the dollar side of the equation.
GBP/USD attempted to breakout of the broad trading range that emerged since the end of last year but prices have pulled back towards 1.2736 at the end of last week. The shorter-term mean reversion was always going to be a possibility with the RSI venturing into overbought territory before the bearish move.
The 50 SMA provides dynamic support with channel support coming in at 1.2585 in the event bearish momentum accelerates from here. Upside levels of interest appear at 1.2800
GBP/USD Daily Chart
Source: TradingView, prepared by Richard Snow
| Change in | Longs | Shorts | OI |
| Daily | 1% | -5% | -2% |
| Weekly | 61% | -30% | -1% |
Wage Growth Accelerates to 30-Year High but Fails to Propel the Yen Higher
Rengo – Japan’s largest labour union group representing around seven million workers – confirmed an agreed upon wage growth figure of 5.28%, the highest in 30-years. Wages and demand-pull inflation have been the two main preconditions identified by the Bank of Japan before local interest rates can be raised out of negative territory.
Inflation has remained above 2% for over a year, somewhat satisfying the second condition but crucially, the 2% target needs to hold persistently above 2%, something that appears at risk as Japanese CPI has fallen rapidly from over 3.3% and is currently at 2.2%. Wages on the other had have risen drastically, which will filter into future inflation forecasts as higher wages leaves consumers with greater disposable income to spend, which pushes prices higher. This is the logic behind a ‘virtuous’ wage-price relationship sought by BoJ Governor Kazuo Ueda.
USD/JPY continued to rise on Friday, building on the dollar boost received on Thursday as the pair looks to be headed for the much talked about 150.00 level. Closing on the daily and weekly candle above the 50-day SMA opens the door for a further retracement of the early March decline.
The weekly chart below reveals the longer-term uptrend which remains intact via the ascending channel where higher highs and higher lows have been observed. The major levels to be watched next week include the 150.00 level where FX intervention remains a risk. The finance ministry has previously voiced displeasure about unfavourably volatile moves that do not represent fundamentals when prices trade at or above 150.00.
However, after the positive wage data, the BoJ may opt to talk up an imminent hike when officials meet on Tuesday. That is, of course, provided they do not opt to surprise the market with a hike at the meeting (41% chance of a hike implied by the market).
146.50 can be treated as a tripwire if the prospect of an imminent rate hike becomes evident. This is likely to result in yen appreciation and a move lower in USD/JPY. One again, there are many factors to consider here and one of those is to evaluate the sustainability of the recent bounce higher in the US dollar.
USD/JPY Daily Chart
Source: TradingView, prepared by Richard Snow
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— Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX