US dollar under pressure
The US dollar underperformed last week as US bond yields continued to fall. Notably, US yields staged a corrective jump on Friday, the first in eight sessions, yet the US dollar continued to move lower. That suggests that Friday’s US yield jump is temporary, and that momentum has well and truly turned for now for the firmer US dollar trade. Fading expectations about the pace of the global reflation trade appear to be the main culprit, although I suspect technical issues in the US bond market, capping yields, are also playing their part.
Having topped out just above 92.80 last week, the dollar index has fallen to 92.17 as of this morning in Asia, falling by 0.27% on Friday. The 91.50 level looms as the critical support/pivot point for the index now. A daily close below 91.50 and its 100 and 200-day moving averages (DMAs) just below will signal an extended period of dollar weakness that would target 90.00. That said, nerves ahead of the US CPI data tomorrow should limit the downside for the greenback for now. An EM equity washout this week would also limit losses there, with the greenback most likely to feel the pressure versus the major currency space.
EUR/USD still languishes at 1.1870 today, ahead of inflation data tomorrow as well. EUR/USD needs to close above 1.1900 to regain upward momentum. GBP/USD looks more constructive at 1.3890 today, with UK data expected to be positive this week. A close above 1.3900 this evening sets the scene for a test of its main pivot level at 1.4000 later this week.
Although Asian currencies have regained some lost ground versus the US dollar over the last week, they face data-related challenges in the coming week. Suppose China, India, Malaysian, Singapore, and Indonesian data suggest that the regional recovery pace is slowing or has halted. In that case, the AFX space is likely to retreats versus the greenback as investors rotate into the DM space. Similarly, a US Core CPI print above 4.0% will increase concerns that US monetary policy, and Asian monetary policy, will soon diverge in their respective tracks. Again, that risks AFX underperformance versus the greenback.