Oct 4, 2022
VOT Research Desk
ANALYTICS and CONSIDERATIONS
Since its peak on Wednesday, the US dollar has lost as much as 3.3%, prompting speculation that the currency has reached its peak.
This retracement appears to be a trend correction in light of how aggressively overbought the dollar had become; however, there is currently no evidence of anything more significant. However, performance around those levels will be crucial for determining near-term strategy because the price is approaching some major supports.
The bigger question is when sell-offs in EUR/USD or GBP/USD might return, and how will USD/JPY hold up with the pair pinned to the 145 level thought to be the line-in-the-sand for Japan’s Ministry of Finance? This is because the US Dollar is a composite of global currencies.
Over the past few months, we have jokingly asked this question what seems like a dozen times. To emphasize the point, however, we believe that the current situation is a pullback, and there is insufficient evidence to suggest anything else.
Naturally, this is the future we’re discussing, so things can shift. However, it has only been a week since the US dollar reached a new 20-year high.
Due to the rapid acceleration of a bullish trend fueled by the British Pound’s collapse, the move was somewhat extreme. Additionally, USD has similarly given up a significant portion of that movement in light of the turnaround in GBP/USD that shorts have covered.
We are referring to Treasury Yields, which set a new high on Wednesday but have since fallen, with many claiming that it has topped. There is another factor driving this.
Last week, strong data and a series of hawkish remarks from various FOMC speakers contributed to a surge in yields. The ten-year note reached 4% for the first time since 2008.The two years reached 4.36 percent, the highest level since October 2007, but have since fallen back to support at 4%.
The Treasury curve’s dynamics may continue to be a crucial component. Notably, investors pay a premium for the additional time before the contract expires because the Fed controls short-term rates, which typically influence the rest of the curve. To reflect the increased premium associated with the additional risk, yield curves frequently slope upward and to the right.
However, investors may instead anticipate a change in the environment, which would result in a change in policy and, consequently, lower interest rates, when there is a sense of caution or fear. In this way, when financial backers start to purchase longer-dated depositories, they’re both catching the yield at that point (like securing there of return on the off chance that the security is held to development) while likewise making a bet that rates will be lower sooner or later. The investor in this instance would have the option to float a principal gain on the investment while also achieving a rate of return that was higher than what the market was offering at the time as rates fell and bond prices rose.
US DOLLARS Prior to the British pound’s collapse beginning last week, the US dollar had already soared. However, given that GBP accounts for 11.9% of the DXY quote, the drop in GBP led to an increase in DXY and a rise in the USD to a new 20-year high. Before turning around, prices were very close to the 88.6% Fibonacci retracement of the major move from 2001 to 2008 before turning around. From the monthly below, we haven’t even really gotten back for a support test at previous resistance.
After that, there is an area that appears to be a little bit more solid as prior resistance because there were two monthly highs carved out around 108.75. That prior resistance from the monthly level is all the way down at the 110.00 level.
Going down to the weekly chart reveals another potential support area: the previous weekly high of 110.79.However, the real focus should be on the area around the 109.85 Fibonacci level and the 110.00 handle, which helped to hold the high for three weeks before the breakdown in GBP/USD, which elevated the bullish trend to a new level.
The prior high of 110.79 is almost in play, and the 109.85-110.00 zone acts as an “S2” area of support below that. Below that, we have a prior double bottom formation around the 107.59 level, and 108.75 is important because it helped set the June high.
If the USD falls below that, we’ll also see a break of the bullish trend line, which could signal a bigger selloff for the dollar.
CURRENCY PARADOX is an important point to make now that a lot of non-FX traders are watching the Forex markets.
Forex stands out from the majority of other markets. There is no other way to measure the value of a currency than by using other currencies because currencies are the foundation of the global financial system. Forex is traded in pairs because of this. We want to know how much the Euro is worth? But against what exactly, because, there isn’t really a way to quote value or price without some kind of yardstick, EUR/USD is frequently the default response to that question.
However, going one step further, the USD’s value is a composite of the underlying currencies. With a share of 57%, the Euro accounts for a sizable portion. The Yen, on the other hand, has a weight of 13.6%, and the British Pound has a weight of 11.9%.The Canadian dollar accounts for 9.1% of the DXY quote, followed by the Swiss franc (3.6%) and the Krona (4.2%).
As a result, the currency’s recent collapse was really the result of problems elsewhere. Recently, the obvious culprit was GBP/USD. However, EUR/USD has pushed below the parity handle in a similar manner over the longer term. And the Japanese yen, which appears to be pegged at 145.00 following the intervention by Japan a few weeks ago.
We will need to see continued weakness in EUR/USD and GBP/USD for the USD to remain strong, and possibly even a rise in USD/JPY and USD/CAD strength. We will go over those below.
EUR/USD EUR/USD experienced a troubling breakdown toward the end of September. The currency pair broke through support to reach a new 19-year low despite the ECB’s increased rate hikes. Price made a run at the psychological level of.9500 but ended up grinding in support at.9950 over the course of three days last week. This resulted in the formation of a morning star formation, which is frequently followed in an effort to identify bullish reversals.
That has continued, and the price is currently back in an earlier support zone that extends from the.9900 handle to parity. Since the price of.9950 served as support a few weeks ago, when sellers were making a big swing on EUR/USD ahead of the breakdown, this seems to be a particularly important level.
EUR/USD NEAR TERM On the four-hour chart, we can get a better look at previous price swings, which may be useful for plotting resistance points.Again,.9950 stands out, but parity is also crucial because this would be the first test since the breakdown above the big number.
Will buyers be bullish on prints that are above parity. If so, the bearish trend line, which currently projects to just inside of the previous swing around 1.0095, provides additional potential overhead resistance.
GBP/USD The British pound began the previous week in complete decline. Although the currency has since recouped a significant portion of those previous losses, it is difficult to determine how much of this jump is short-covering and how much is legitimate buying interest at this point, particularly given the opaque nature of the circumstance that initially resulted in the collapse.
In addition, despite the strength of the GBP/USD movement, the GBP/JPY movement has been jaw-dropping following the test of a crucial long-term support level during the panic of the previous week.
It is too early to determine whether this is a bounce or a bottom for GBP.GBP/USD continues to climb, and at this point, price is testing through resistance at prior support, which is around 1.1350. I rely more on price than headlines or emotions for such matters. As a result, the chart’s 1.1460-1.1500 region becomes the next potential area of resistance.
After a previous support-turned-resistance swing at 1.1210, I’m following a short-term support level around 1.1282.A break below 1.1210 reopens the door to a push back into the 1.1019–1.1000 region, where the psychological level is a major focus.
USD/CAD was a pretty good illustration of the USD’s parabolic move. Oil prices were falling as interest rates rose, contributing to the addition of a few strong fundamental factors on the long side of the pair and ultimately leading to the push up to a new two-year high.
Prior resistance is all the way down at the 1.3225 area, which shows how aggressive this trend is. The high the previous week was more than 600 pips away from that, and now some of that move is being reversed.
After the Japanese Finance Ministry intervened a few weeks ago, buying JPY, which essentially amounted to a 500 pip pullback that triggered a number of stops and washed out a number of longs, USD/JPY has become a difficult situation. In my opinion, this is now a game of cat and mouse.
We have extensively discussed this scenario just prior to the most recent BoJ meeting, highlighting the 31-year highs of inflation in Japan despite the BoJ’s continued loose and passive stance with negative rates.
The BoJ did not make any changes, and Governor Kuroda of the BoJ even stated that he did not anticipate any changes to the forward guidance for years. The USD/JPY reacted by rising above 145, and a few hours later, the Finance Ministry requested that the BoJ intervene in the market to reverse the trend.
The price is fixed at 145 because this implies a theoretical line in the sand. However, and this is a significant factor, I pointed out right after the intervention pushed the price back to support that longs are still being encouraged by the rate differential, which keeps the carry positive in
USD/JPY.
Is a break above 145 acceptable to the Finance Ministry. Or, will they continue to buy down a trade that is driven by their own monetary policy by using finite FX reserves? At this point, it’s hard to say, and We think the techs aren’t very clear. However, considering what transpired two weeks ago, in the event of an intervention-fueled sell-off, even more traders will likely focus on support in an effort to convince price to return to the 145 area.
