Dollar Slides More as Risk Appetite Continues to Improve

The US dollar continued to drift south, while equities extended their recovery, perhaps as a couple of Fed officials disappointed market expectations of nearly five increases by the end of the year, and perhaps a 50bps hike at the March meeting. Today, we have Eurozone’s CPIs, which are expected to slow notably, but bearing in mind that the German rates remained unchanged, we would consider the risks as tilted to the upside.

USD DRIFTS SOUTH, WHILE EQUITIES CONTINUE TO GAIN

The US dollar continued trading lower against all the other major currencies on Tuesday and during the Asian session Wednesday. It lost the most ground versus AUD, NZD, and GBP, while it underperformed the least versus CAD.

The weakening of the US dollar, combined with the strengthening of the risk-linked Aussie and Kiwi, suggests that the financial world continued trading in a risk-on mode. Indeed, turning our gaze to the equity market, we see that major EU and US indices were a sea of green, with the increased appetite rolling into Nikkei’s session today. The other Asian indices under our radar remained closed.

Yesterday, we noted that Monday’s rebound in equities may have been the result of portfolio rebalancing and that this may continue for a while more, despite no major change in the fundamental outlook. This may have indeed been the case, but remarks by some Fed officials may have also encouraged some more risk-buying.

Philadelphia Fed President Patrick Harker said yesterday that it may be appropriate to proceed with four hikes this year, at a time when market participants are pricing in nearly five liftoffs, while St. Louis Fed President James Bullard, who is considered to be a hawk, said that he does not favor double hikes, disappointing those expecting a 50bps increase at the upcoming Fed meeting.

As for our view, it has not change much. Yes, some further advances may be in the works for a while more, but we are still reluctant to call for a long-lasting recovery. Expectations are still for higher rates this year in most major economies, and on top of that, uncertainty surrounding Ukraine remains elevated. So, as we noted yesterday, we prefer to trust some more recovery in Eurozone indices, and this is because we see the case for the ECB to lift interest rates much slower than the Fed.

Speaking about the Eurozone and the ECB, today, we get the bloc’s preliminary CPIs for January, with both headline and core inflation expected to have slowed notably. However, bearing in mind that Germany’s rates did not decline as their own forecasts suggested, and instead stayed unchanged, we would consider the risks as tilted to the upside. Better-than-expected numbers could allow some euro-traders to maintain their bets with regards to a small rate increase by the ECB later this year, which, in a weakening USD environment, could help the euro gain somewhat.

However, we need to be careful. Any further recovery in the euro could stay very limited and short lived. Remember that, tomorrow, we have an ECB decision, and if the Governing Council sticks to its guns that a rate hike this year is unlikely, we could see the euro coming back under renewed selling interest.

DAX — TECHNICAL OUTLOOK

The German DAX cash index traded higher yesterday, clearing the 15620 barrier, marked by the inside swing low of January 19th. Overall, the index continues to print higher highs and higher lows above an upside support line drawn from the low of January 24th, and thus, we would see decent chances for more advances.

We believe that the bulls could stay in charge for a while more, and perhaps target the 15920/63 territory, marked by the highs of January 20th and 18th, respectively. If they are not willing to stop there, then we could see them pushing towards the high of January 13th, at 16090, the break of which could carry extensions towards the peak of January 5th, at 16285.

On the downside, we would like to see a clear dip below 15335 before we start examining whether the bears have gained the upper hand. Such a move could confirm the break below the aforementioned upside line and perhaps allow declines towards the 15113 or 15045 zones, marked by the lows of January 28th and 27th, respectively. If those barriers are not able to halt the fall, then we may see extensions towards the low of January 24th, at 14843.

USD/CHF — TECHNICAL OUTLOOK

USD/CHF has been in a tumbling mode since January 31st, when it hit resistance at 0.9343. Yesterday, the slide hit support at the 0.9204 level, and paused slightly above it. In our view, the short-term bias remains to the downside, but before we start examining further declines, we would like to see a clear dip below 0.9204.

A strong break below that hurdle could pave the way towards the low of January 25th, at 0.9160, and if the bears are not willing to stop there, its break could carry larger bearish implications, perhaps setting the stage for declines towards the 0.9110 and 0.9095 zones, marked by the lows of January 24th and 14th, respectively.

In order to start examining a potential recovery, we would like to see a rebound back above 0.9252, a resistance marked by the inside swing low of January 31st. This could initially aim for yesterday’s high, at around 0.9277, the break of which extend the advance towards the inside swing low of January 28th, at 0.9295. If that zone is not able to stop the bulls either, then we could see them climbing all the way back to the peak of January 31st, at 0.9343.

AS FOR THE REST OF TODAY’S EVENTS

Besides the Eurozone CPIs, we also get the US ADP employment report for January, with the forecast suggesting that the private sector added 208k jobs from 807k in December.

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Originally published at https://www.jfdbank.com.

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