US dollar weakness might be short lived: The Week Ahead

I had been anticipating a retracement on the US dollar index, given it had risen in a relatively straight line from the December low before printing bearish reversal candle around trend resistance, a volume cluster and the 105 handle. This week we saw the US dollar weaken and break beneath the Doji low, yet most of its early-week losses have been recouped and incoming data along Fed speak makes it hard to justify an overly bearish view on the USD.

With that said, I am not yet convinced the US dollar index will simply rally from here and break above 105. But a glance across the FX majors could help reveal the better pairs to bet against with US dollar strength in mind.

Source: TradingView

AUD/USD is on track to rise for a third week after two marginally bullish pinbars, yet price action on the daily chart suggest a swing high may have formed around its 200-day EMA
EUR/USD also formed a bearish pinbar on Thursday, although we’d prefer to wait for a break below 1.08 to confirm a swing high, given the pinbar formed just above the 200-day EMA
USD/CHF is currently flat for the week, yet a nice trend has formed on the daily chart to suggest further gains could await, which brings the volume cluster around 0.90 into focus for bulls
USD/JPY has formed a bullish trend on the 1-hour chart, and its retracement into a support zone suggests a swing low may have formed and that it wants another crack at rising towards 150.80

The week that was:

Nvidia beat Q4 earnings estimates by 7% which saw the stock rise over 15% during after-hour trade and help Wall Street index futures pare losses of the prior two days
The Nikkie 225 reached a record high with a break above its 1989 high, which paved the way for Dax futures to also print a record high ahead of the S&P 500, Dow Jones and Nasdaq 100
The FOMC minutes saw most Fed members agreed over concerns of cutting interest rates too soon
Fed Waller urged patience on rate cuts in a subsequent speech, sending US yields higher (US02yr is at a 10-week high at the time of writing)
China’s equity markets rallied for a second week as it became apparent that Beijing had taken further steps to protect the market and make it easier for the ‘plunge protection team’ to do its jobs
Canada’s inflation data came in broadly lower than expected, which initially sparked hopes of a less-hawkish Fed (but those hopes did not last)

The week ahead (calendar):

The week ahead (key events and themes):

US PCE inflation, ISM manufacturing
Australian CPI, retail sales
RBNZ cash rate decision, press conference

US PCE inflation, ISM manufacturing, GDP

Fed members have managed to keep the doves at pay as money markets have mostly scaled back bets of multiple cuts from the Fed this year. Yet they are still trying to price a cut or two in. So traders will keep a close eye on several data points next week to see how the economy is holding up and assess if inflation could move higher.

The key event next week is easily the PCE inflation report on Thursday. We already saw headliner CPI figures come in higher than expected, so it is not impossible to see PCE data follow suit – even if it is generally the less volatile data set of the two. If higher core PCE is to rise and then be followed by an expansive ISM manufacturing report, the US dollar is likely to catch a bid as bets of a cuts this year are all but eradicated. Also note that new orders, prices paid and employment sub-indices expanded last month, all of which points towards the inflationary forces doves do not want to see.

Trader’s watchlist: EURUSD, USD/JPY, WTI Crude Oil, Gold, S&P 500, Nasdaq 100, Dow Jones

Source: Refinitiv

RBNZ cash rate decision, press conference

The RBNZ will hold their first monetary policy decision of the year next week. The thought of the RBNZ potentially hiking rates again this year was not on the radar a couple of weeks ago, yet ANZ’s call for two more 25bp hikes this year has sent NZD pairs higher in recent days. The ANZ admit that their call has been made with lesser-known and obscure data sets, but the concern is that inflation is not under control and the economy could be susceptible to another round of higher prices.

The cash rate is currently 5.5%, and the OIS curve shot higher on the day the ANZ announced their OCR revision. At the time of writing, the 3-month OIS estimates a ~60% chance of a 25bp hike by May which would send the cash rate to 5.75% - the highest among FX major central banks.

Although it is very likely the RBNZ will holds their cash rate next week, it will be interesting to hear the RBNZ’s view on the inflation situation in light of ANZ’s hawkish cash-rate revision.

As a reminder, the RBNZ’s November statement reiterated that “inflation remains too high” and that “interest rates will need to remain at a restrictive level for a sustained period of time”. This translates to higher for longer rates without a hawkish bias, so if little is changed to the statement it assumes the ANZ are on the wrong side of their own bet.

Trader’s watchlist: AUD/USD, NZD/USD, AUD/NZD, NZD/JPY, AUD/JPY, ASX 200

Source: Revinitiv

Australian CPI, retail sales

In all likelihood, these data points won’t move the RBA’s needle in either direction unless they move one way or the other in tandem. The RBA retained their hawkish bias despite few expecting further hikes from them, so it is really a case of seeing whether further signs of a slowing economy surface to justify the removal of the pesky hawkish bias.

The official quarterly inflation report may be the preferred measure for the RBA, but the newer monthly CPI report helps them keep a more timely check on the potential direction of the quarterly report. However, take note that the ABS (Australian Bureau of Statistics) also revise their CPI basket, which runs the risk of services items gaining a greater weighing which could make services inflation stickier.

Also keep an eye out for retail sales which dipped noticeably in December. Any further signs weakness here points towards a strained consumer, and less case to hike and more of one to cut at some time in the future.

Trader’s watchlist: AUD/USD, NZD/USD, AUD/NZD, NZD/JPY, AUD/JPY, ASX 200

Source: Refinitiv

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.

The products and services available to you at FOREX.com will depend on your location and on which of its regulated entities holds your account.

FOREX.com is a trading name of GAIN Global Markets Inc. which is authorized and regulated by the Cayman Islands Monetary Authority under the Securities Investment Business Law of the Cayman Islands (as revised) with License number 25033.

FOREX.com may, from time to time, offer payment processing services with respect to card deposits through StoneX Financial Ltd, Moor House First Floor, 120 London Wall, London, EC2Y 5ET.

GAIN Global Markets Inc. has its principal place of business at 30 Independence Blvd, Suite 300 (3rd floor), Warren, NJ 07059, USA., and is a wholly-owned subsidiary of StoneX Group Inc.