Article by: ETO Markets
This week, the foreign exchange market was affected by the strength of the US dollar, the Fed's policy expectations and geopolitical tensions. The US dollar continued to strengthen, driven by the rise in the US 10-year Treasury yield to 4.41% and optimistic economic data expectations. Initial jobless claims are expected to rise slightly to 220K, and existing home sales will increase to 3.93 million, showing the resilience of the US economy. At the same time, Trump's potential high tariffs and tax cuts may drive inflation, exacerbating market expectations that the Fed will slow down the pace of interest rate cuts, further consolidating the appeal of the US dollar.
Geopolitical risks are another key factor. The Biden administration's approval of Ukraine's use of long-range missiles to attack targets in Russia, coupled with North Korea's dispatch of troops to Russia to support its war efforts, has caused market concerns about escalating conflicts and safe-haven funds to flow into the US dollar and gold. In addition, the euro is under pressure due to the lack of economic recovery, the yen is constrained by Japan's loose monetary policy, and the Australian dollar and New Zealand dollar are weak due to weak demand in China and global uncertainty. Although the US dollar will continue to dominate the market in the short term, future economic data and geopolitical developments will have an important impact on its trend.
This week, the U.S. dollar against the Japanese yen (USD/JPY) was influenced by both Bank of Japan (BoJ) policy expectations and Federal Reserve developments. The yen strengthened ahead of an upcoming speech by BoJ Governor Kazuo Ueda, but yen bulls were cautious amid uncertainty over whether the BoJ will further tighten policy. Markets are currently pricing in a 50-50 chance that the BoJ may raise interest rates by 25 basis points or maintain the status quo at its last policy meeting in December. In addition, Japan's nationwide core consumer price index (CPI) data will be released on Friday, which may provide guidance on the BoJ's future policy.
Meanwhile, U.S. Treasury yields remained elevated, benefiting from the inflation-driven policies that Trump may pursue after his election as president and the Fed officials' cautious attitude towards further rate cuts. Recent comments from Fed officials, such as those from Lisa Cook and Michelle Bowman, suggest that the Fed may pause rate cuts if progress in reducing inflation slows, which provided support for the dollar. In addition, market expectations for Trump's economic policies also limited the yen's safe-haven demand. Overall, the strength of the U.S. dollar and rising U.S. Treasury yields may limit further yen strength in the short term.
From a technical perspective, USD/JPY is showing resilience against support below the 100-period Simple Moving Average (SMA) on the 4-hour chart. Oscillators on the daily chart remain in positive territory, suggesting that any further declines could attract buying in the …-… area and limit losses towards … (200-period SMA). A break below the … support could lead to further testing of this week’s lows in the … area.
On the upside, … acts as a short-term resistance, a break above which could push USD/JPY to retest the psychological … level. If buying continues, further gains to the multi-month high of … hit last Friday are possible.
This week, the Australian dollar rebounded against the U.S. dollar (AUD/USD) on the back of the Reserve Bank of Australia's (RBA) hawkish policy stance, but the overall trend was still constrained by the strength of the U.S. dollar and global risk aversion . The minutes of the RBA's November meeting showed that its board remained highly alert to inflation risks and stressed the need to maintain tight monetary policy at present, although there was no "urgent need" to adjust interest rates in the short term. At the same time, Australian Treasurer Jim Chalmers mentioned the negative impact of falling iron ore prices and a slowing labor market on government revenue, reflecting the challenges facing the Australian economy.
On the other hand, recent cautious comments from U.S. Federal Reserve officials and potential high tariffs and tax cuts after Trump's election as president may boost inflation expectations and slow the Fed's pace of rate cuts, providing support for the dollar. In addition, although the escalation of the conflict between Russia and Ukraine has triggered risk aversion, the market's optimism about the economic prospects of China and the United States and the statement of confidence in economic recovery by the National Development and Reform Commission of China partially offset these concerns. Traders will also pay close attention to the upcoming U.S. unemployment claims data, the Philadelphia Fed manufacturing index and existing home sales data, which may provide more guidance on the trend of the U.S. dollar.
From a technical perspective, AUD/USD is currently trading around …, indicating downside pressure in the short term. On the daily chart, the pair continues to move within a descending channel, with the 14-day relative strength index (RSI) below 50, supporting the bearish trend. If the price falls further, it may test the lower support of the descending channel at …, followed by the yearly low of … (August 5).
On the upside, short-term resistance is at the 9-day exponential moving average (EMA) of … and the 14-day EMA of …. A break above these resistance levels may weaken the current bearish sentiment and provide momentum for the exchange rate to rebound to a four-week high of ….
