FX Market Round-up: How long will the US dollar retracement last?

Friday, 16th April 2021 10:08 - by Rajan Dhall

This week has been interesting as there has been lots of central bank speakers and we have been getting lots of clues about what they have planned as the major nations move out of their respective lockdowns.

In the US, the main takeaway has been to watch the actual data based on the Fed's mandate and not to focus on the dot plot. The dot plot is the projection from the Fed members to tell us when they think they will raise interest rates.

Their mandate is mainly the employment levels as they have said on many occasions they are willing to take an overshoot for inflation. The latest NFP reading is enough to make many people optimistic but any change from the lowest levels are bound to be dramatic.

Some Fed members have even stated they believe the Fed could reach its employment target by the end of next year. Fed's Powell keeps using the phrase inflection point when describing where they stand and he has a good point as inflation is nearing its long-term goal but unemployment has taken such a massive hit due to the pandemic.

There are a few geopolitical issues to keep in your mind at the moment. China is moving closer and closer to Taiwan and the Russia vs Ukraine situation seems to be escalating once again.

Japan and the US are set to make a statement about the Chinese moving jets into Taiwanese airspace recently. This is the first time the nations are having to do this in half a century.

As for Russia and Ukraine, Ukrainian officials have said they do not want to enter into a military conflict with Russia. The US has now taken steps to sanction Russia and have told banks they cannot sell any Rouble denominated bonds.

Looking at the daily dollar index chart below, it is clear to see there has been a move back lower in recent sessions. The price has now hit the 50% Fibonacci retracement and this area matches with a previous level which could provide some support.

Longer-term, we need to see if this is a base formation and the only way we will find out is if the wave high at 93.33 breaks. This would also give us three consecutive higher low and higher high waves and pretty much confirm the trend change from a broader term perspective.

Source: TradingView

The other pair I wanted to highlight was GBP/NZD. The Kiwi dollar has strengthened dramatically and has moved 3.15% lower toward the 1.90 area.

Incidentally, that is the next major support area marked in green but the price has not closed below the red upward sloping trendline. This is partly because of the way the government in New Zealand has handled the COVID-19 pandemic but recently the RBNZ has had a meeting.

They left the cash rate unchanged and they say they are prepared to lower the rate further if required. The large-scale asset purchases program (LSAP) was left at NZ$100bn. Lastly, the bank says they will leave current monetary policy settings in place until it is confident that inflation and jobs targets are achieved.

Looking closer at the chart, now the orange level has been broken there is a chance that the price could come back and retest to the zone.

Even if the trendline is broken the price often comes back to retest. The next support at the green area could be in focus in the coming weeks and if it breaks 1.86 could be the target for the bears. GBP had a long run of success especially against the USD but it seems to have hit a roadblock of late.

This might not be due to some fundamentals factors the pound was just very overstretched. 1.4245 was a massive resistance zone in GBP/USD and it happens to be close to the April 2018 high.

Looking ahead, if the strength in the commodities markets continues then there could be every chance that the NZD strength could continue. They both respond very well to a good risk environment but commodities vs stocks could be the real battle here.

Source: TradingView

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.