There has been a notable shift in the outlook for major forex. The outlook for the USD has improved. This comes as the US continues to be seen as a relative economic outperformer. Persistent hawkish Fed speak has also helped to sustain a more positive USD too. This is driving significant breaks of important trading levels on major forex pairs. This sets up for further USD gains.

  • Economic data and hawkish Fed speakers helping the USD, so watch the flash PMIs and Jackson Hole
  • One near-term caveat is the reaction of AUD and NZD to the PBoC rate cut.
  • Higher real yields support the case for a stronger USD
  • USD is strengthening against major forex

Economic data and watch for Fed speakers

The economic data has been reflecting the diverging fortunes of the US versus other major economies. This has gathered pace in the past week with the deterioration in the economic data for China (industrial production and retail sales both badly missing). Eurozone economic data has also been consistently revealing worrying signs of a slowdown in the euro area (such as the German ZEW and a downgrade to Q2 GDP). 

Whilst the data out of the US has been more mixed (mixed regional Fed surveys and Retail Sales), traders are taking a view that the US is the best placed for economic outperformance. This is also reflected in the constant stream of hawkish Fed speakers who consistently argue for more aggressive monetary policy and the resilience of the US economy.

The flash PMIs this week will add further meat to the bones of this outlook. The Eurozone is expected to show further deterioration in the outlook for August, whilst the US is expected to show an improvement.

We also look at the Jackson Hole economic symposium at the end of the week. Fed chair Powell is expected to bolster the view of more rate hikes to come and that rates will not be coming down for much of 2023 (or even beyond).

Real yields moving higher support the USD

The result of all this is that US Treasury yields (especially longer duration) have been rising in the past week. With nominal yields have been rising more than inflation expectations, this has meant that “real” bond yields (bond yields minus inflation) have also increased.

This increase in real yields is positive for the USD. The Dollar Index still has a strong positive correlation to real US bond yields.

Although bond yields in the Eurozone have also picked up in the past week, the moves are widening the core/periphery spread (such as German versus Italy). The widening spread tends to be EUR negative.

USD performing well again 

Subsequently, the USD performance has been strong versus major forex in the past week. Although there has been a minor tick higher for the Aussie and Kiwi today, the trend is continuing for the USD.

However, that uptick in AUD and NZD has come in the wake of the rate cut by the People’s Bank of China. This is a near-term caveat for USD outperformance. But away from those two, the USD strengthening is holding firm.

EUR/USD drops to parity

Looking at the charts of major forex, we see the significant impact of a stronger USD. EUR/USD has dropped to within a whisker of parity again today. Back in July, this induced the formation of near-term support as the market eventually rebounded from 0.9950. 

However, back in July, the RSI was below 30 and succumbed to a near-term technical rally. This time, the deteriorating RSI is only in the mid-30s and has further downside potential. There is key resistance now 1.0095/1.0120 for any near-term bounce. We would look to sell near-term strength for further pressure on 0.9950/1.0000 in due course.

GBP/USD is another pair that looks strongly negatively positioned and set for further downside. Reaction to the support at 1.1760 will be key. A downside break means there is no support of note until 1.1410. There is considerable resistance between 1.1890/1.2000 which would likely restrict recoveries. Again we would look to sell into near-term strength.

We also believe that higher US bond yields are supportive of USD/JPY. The near-term break above 135.60 resistance has opened the multi-year highs again at 138.85/139.40. We would look to use any weakness towards 135.30/135.60 (a mid-range pivot) as a chance to buy.

As we discussed earlier, the AUD has picked up this morning. This is the one main caveat against a stronger USD in major forex. Interestingly, this has helped to maintain support at 0.6860/0.6875 on AUD/USD. We have been expecting a downside break of this support (the RSI has already broken decisively below 50). We will now be monitoring how the market continues to react to this support in the coming days. A closing breach would now come with added significance.

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