The foreign exchange market this week is mainly influenced by the US CPI data and the Federal Reserve policy expectations. Us inflation data showed that the headline CPI rose 2.9% in July from a year earlier, while the core CPI fell to 3.2%, further supporting expectations that the Federal Reserve may cut interest rates in September. The dollar has strengthened on the back of subdued inflation, especially after market expectations for a bigger rate cut fell, and its rebound has affected the performance of other currencies.
Heightened geopolitical risks and escalating tensions in the Middle East, especially the conflict between Israel and Hamas, have increased risk aversion in the market, with the dollar and gold supported by haven demand. The euro and the Australian dollar have come under pressure from both the strong US dollar and the weak local economy, with the Australian dollar particularly affected by the slowdown in the Chinese economy.
Overall, the dollar has strengthened this week on the back of subdued inflation and safe-haven demand, while other currencies have underperformed on weak economic data and geopolitical risks.
The EUR/USD has maintained its upward trend, benefiting from the weakness of the US dollar and easing inflation expectations. The latest US CPI data for July showed that inflation continued to fall, which reduced the likelihood of the Federal Reserve cutting interest rates aggressively in September. Market sentiment shifted toward a smaller quarter-point cut, with CME Group's FedWatch tool showing the probability of such an outcome rising to 65 percent. Meanwhile, data from Europe have been mixed. While eurozone GDP growth was revised up in the second quarter, the contraction in industrial production in June could limit further gains in the euro. The European Central Bank (ECB) remains silent on future monetary policy, with the market pricing in two additional rate cuts later this year, which could further align the policy paths of the Fed and the ECB, supporting the EUR/USD over the medium term. Us retail sales data will be released on Thursday, which will give the market more clues about the state of the US economy. The performance of consumer spending will be an important indicator of whether the U.S. economy is at risk of recession. Any widening of the divergence in economic performance between the US and the eurozone could affect the relative strength of the two currencies.
The EUR/USD has now extended its upward momentum, trading near … and rising for the third straight day this week. The current resistance is near …, which is the August 14, 2024 high. If this level is breached, the next target will be a peak of … on December 28, 2023. The key support below is around the 200-day Moving Average (SMA) of …, followed by the weekly low of … on August 1 and the low of … on June 26. As long as prices remain above the 200-day moving average, the overall uptrend is expected to continue. The four-hour chart shows that the EUR/USD is experiencing a strong uptrend, with the Relative Strength Index (RSI) rising to around 73, indicating strong bullish sentiment. The current resistance levels are around … and …, while the support levels are around … and the 200-day SMA …, a break below these support levels could trigger a deeper pullback.
The AUD/USD rally has been constrained by poor performance in commodity markets, particularly declines in copper and iron ore prices, which reflect weakness in the Chinese economy. Nevertheless, the overall outlook for the Australian dollar is strongly supported by the Reserve Bank of Australia (RBA). The RBA recently left the cash rate unchanged at 4.35 per cent and expressed caution about inflation risks, indicating it was not ready to cut rates and would do so again if necessary. This monetary policy stance has bolstered confidence in the Australian dollar. On the other hand, economic data from the United States continues to be strong, boosting the dollar, and although the Federal Reserve is expected to ease policy in the medium term, the impact of this expectation on the dollar is limited for the time being. In addition, weakness in the Chinese economy continues to weigh on the performance of the Australian dollar, particularly as weak demand from China, the world's largest importer of goods, weighs on Australia's export outlook.
From a technical point of view, the AUD/USD is facing resistance around the … zone, which is also the 61.8% Fibonacci retracement of the sharp fall in July-August. In the short term, the pair is blocked by the horizontal resistance of …, and if this resistance is broken, it may move further to the … area. However, in the event of a decline, the 100-day SMA at … provides the first support, and a break below this level could lead to a retreat to the annual low of …. The four-hour chart shows that the upward momentum of the pair has weakened slightly, with the Relative Strength Index (RSI) falling to around 55, suggesting that the market may be entering a consolidation phase. Overall, as long as the pair remains above the 200-day SMA (…), it is still expected to maintain a short-term upward trend. However, if downward pressure builds, watch for support at …, a breach of which could trigger further downside risk.
