The run to the end of the month can often be subdued, and as the final week develops, it looks to be a fairly familiar theme. In forex, as the Dollar Index breaks down once more today there is a sense that existing trends are still in place. We are seeing a strengthening EUR develop and we continue to back CAD and GBP longs.
USD downside still has room to run
We increasingly favour EUR, and EUR/USD breaking out today looks to be another key move.
CAD and GBP are also still relative outperformers.
USD weakness continues
The dollar remains under selling pressure. Unless there is a huge surge in job creation and improvement in the labor market (always watching Nonfarm Payrolls), we believe that this is likely to continue for the coming weeks. With building inflationary forces still a factor, the employment part of the Federal Reserve’s dual mandate needs to pick up sustainably to change the narrative from the FOMC.
So we expect Treasury yields to remain subdued (they are beginning to fall again) and therefore USD to weaken further.
Here is the performance of major forex versus USD in the past three weeks. Everything is outperforming USD over the period. CAD, CHF, EUR and GBP are all performing very well.
EUR is breaking out
One of the reasons behind Dollar Index falling away again is the resurgence of EUR (which makes up around 55% of Dollar Index). EUR is rallying because:
Improving yield differentials (the gap between Eurozone bond yields and US Treasury yields is narrowing, which improves the relative standing of EUR versus USD).
The acceleration of the COVID vaccination roll-out across Europe.
The improving Eurozone economic data that shows the Q2 economic recovery is finally finding traction.
So looking at the chart of EUR/USD we see the move through resistance at 1.2240 today. A decisive close through would put the pair on course to put pressure on 1.2350 which was the key January high. We see any weakness as a chance to buy now, with good support 1.2150/1.2180.
CAD still strong, and GBP could follow EUR higher
We also see the Canadian dollar still performing extremely strongly (as it has done for several months) as the downtrend channel on USD/CAD continues. The only slight caveat is a hint of positive divergence, with the Relative Strength Index which has been posting higher lows as the price has fallen to lower lows. However, resistance 1.2145/1.2200 is pretty strong now overhead and any near term technical rebound will be seen as another chance to sell for positions below 1.20.
We also back GBP strength too and play this alongside the USD weakness. GBP/USD moving higher to close above 1.4165 was a key move last week. Momentum is strongly positive and suggesting that any weakness in a band of support 1.40/1.41 is still a chance to buy. We are looking for a close above 1.4240 to open the upside towards 1.4375.