The US dollar traded mixed against the other major currencies yesterday and today in Asia, with the yen weakening, and the Loonie gaining the most. The other risk-linked currencies, Aussie and Kiwi, also gained somewhat, confirming the improving picture in the broader market sentiment. With no clear catalyst, it could be due to Friday’s options expiry and the lack of central bank decisions this week, but also due to reassuring remarks by ECB President Lagarde. Today, we got the RBA’s minutes, as well as a speech by Governor Lowe, both of which added credence to the overly hawkish expectations around the RBA’s future course of action.
Market Sentiment Improves, RBA’s Lowe Supports More Rate Hikes
The US dollar traded mixed against the other major currencies on Monday and during the Asian session Tuesday. It gained ground versus JPY, while it underperformed against CAD, GBP, AUD, and NZD, in that order. The greenback was found nearly unchanged versus EUR and CHF.
Despite the mixed performance of the US dollar, the weakness in the yen and the strengthening of the risk-linked currencies suggest that the financial community may have traded in a risk-on manner yesterday and today in Asia. Indeed, turning our gaze to the equity world, we see that major European shares traded in the green, with France’s CAC 40 gaining the least after Emmanuel Macron’s centrist Ensemble coalition secured the most seats in the National Assembly over the weekend, but fell well short of securing an absolute majority. Wall Street remained closed in celebration of the Juneteenth, while the relatively upbeat appetite rolled over into the Asian session today. Only China’s Shanghai Composite traded in the red.
With no clear catalyst behind the rebound this week, we could say that it may have been Friday’s options expiry and the lack of major central bank decisions this week. Remarks by ECB President Lagarde later in the day may have also helped. For sure they did not cause any harm. Lagarde reiterated the ECB’s commitment to lift interest rates next month, and maybe by a larger size in September, but she also said that they will do so while fighting widening spreads in the borrowing costs of different Eurozone members. Although she never denied addressing “fragmentation”, last week, she said that the ECB’s aim is taming inflation and not helping budgets, which did not sound very well to investors’ ears. Now, saying that they will fight the situation may have echoed more pleasing, and that’s why participants continued to add to their exposures during the rest of the day.
However, Lagarde’s speech was not the only event we had related to central banking and monetary policy. Today, during the Asian session, the RBA released the minutes of its latest gathering, with the report confirming that the Board agreed that further rate increases would be required. We also got remarks from Governor Lowe, who said that Australia should be prepared for more interest rate increased, and that the current level is still very low. This added more validity to market expectations of multiple rate hikes by the RBA in the next months. Having said all that though, even if this is positive for the Aussie in the short run, expectations over faster tightening in the rest of the world, could hurt again the broader sentiment. Therefore, due to its risk-linked status, the Aussie could come under renewed selling interest soon.
EUR/USD — Technical Outlook
EUR/USD has been trading in a consolidative manner recently, staying capped by the 1.0545 zone. Overall, the rate remains below the downside resistance line taken from the high of February 10th, but most importantly, below the key zone of 1.0625/50, which acted as an important support or resistance zone in the recent past. In our view, all this paints a negative short-term picture.
We would expect the bears to take charge again soon and aim for a test near the 1.0445 barrier, marked by the low of June 17th, or near the 1.0400 territory, defined as a support by the lows of June 13th and 14th. If neither zone is able to halt the slide, then we could see a test at around 1.0350, marked by the lows of May 12th and 13th, the break of which could taken the rate into territories last tested in 2002. The next support may be at around 1.0235, near the inside swing high of July 2002.
On the upside, we would like to see a clear break above the 1.0765/88 zone, which acted as a key resistance between May 24th and June 9th. The pair will already be well above the aforementioned downside line and the bulls may initially challenge the 1.0845 zone. A break higher could see extensions towards the high of April 21st, the break of which could carry extensions towards the inside swing low of April 1st, at around 1.1025.
AUD/USD — Technical Outlook
AUD/USD traded slightly higher yesterday, but the recovery remained short-lived near the round number of 0.7000. In the slightly bigger picture, the pair remains below the downside resistance line taken from the high of June 3rd, which keeps the short-term outlook still negative.
Therefore, even if we see some further advances, we expect the bears to take charge again soon and perhaps target the 0.6900 territory, marked by the low of June 17th. A break lower could target the 0.6830 zone, marked by the low of May 12th, which if also surrenders, then we could see larger declines, towards the 0.6690 zone, defined as a support by the inside swing high of May 29th.
On the upside, we would like to see a clear break above 0.7150 before we start considering the bullish case. The pair will be already above the pre-mentioned downside line, and thus, the bulls may climb to the 0.7270 zone, or even the 0.7345 territory, marked by the inside swing low of April 18th. A break higher could extend the advances towards the 0.7458 zone, marked by the peaks of April 20th and 21st.
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