US dollar forecast: No signs of reversal yet

If you look at the rallying global equity markets, investors are evidently very optimistic about the US debt ceiling negotiations and not too worried about the slowdown in China. Yet, the same optimism is not evidenced in FX markets, with the dollar remaining on the front-foot. But is that about to change, will the US dollar forecast turn more bearish moving forward?

Rallying equities not enough for risk-sensitive FX pairs

This morning saw the German DAX index causally rally another 200 points to hit its highest level since January 2022. Elsewhere, the Nikkei has been on a tear, rising 17% from its March low to break the September 2021 peak. The day before, saw the Nasdaq 100 climb to its best level since last August, and index futures were pointing to another higher open on Wall Street today.

But unlike equities, the FX markets are not so cheerful. Admittedly, the JPY crosses have been on a tear along with the Japanese equity markets to suggest it is indeed “risk-on”. But if you look at the US dollar against other currencies, you will get a different picture – for it is also continuing to rise against the more risk-sensitive currencies like the AUD, GBP and EUR.

US data surprises to upside

In terms of economic data, we have just seen the release of jobless claims. Claims surprised on the upside las week but were expected to decline from 264K to 252K. However, if they came better at 242K, thus supporting the dollar further. What’s more, the May Philly Fed came in -10.4 versus -19.8 expected.

Later in the day we have existing home sales data, while Philip Jefferson, Michael Barre and Lorie Logan are among today’s Fed speakers.

China concerns holding back commodity currencies

Global demand concerns have dragged on sentiment towards commodity FX in recent weeks, following the release of a number of disappointing data pointers from China in April. Among other things, these include most recently retail sales and industrial production. We also saw a big drop in imports while house prices fell again, extending the decline to 11 consecutive months. China’s property sector is key for the economic growth outlook as it accounts for around 20% of the country’s GDP. As well as the AUD and NZD, we have also seen the yuan slump to lift the USD/CNH pair to levels not seen since November.

US dollar forecast: Will the greenback weaken again?

In the US, interest rates are already at a peak and inflation is on a downward trajectory. There is a possibly that the economy is going to weaken in the months ahead, allowing the Fed to pivot by as early as September.

In the short-term, the potential weakness for USD could arise from a potential rebound in foreign currencies, should improving risk appetite make its way into risk-sensitive currencies. President Joe Biden and House Speaker Kevin McCarthy’s rhetoric have narrowed, and both are optimistic about achieving a deal by Sunday.

Will major FX pairs rebound?

So, are we going to see the risk-on trade make its way into the FX markets today and see the likes of the EUR/USD, GBP/USD, AUD/USD and CAD/USD rebound?

Source: TradingView.com

Well, if you look at the GBP/USD and EUR/USD, they are both testing some interesting technical levels of around 1.24ish and 1.08ish, respectively. The AUD/USD remains in the lower half of its tight 200-pip range between 0.66 to 0.68. There’s a similar pattern on the NZD/USD pair. But the USD/CAD has started to trend a little lower, closing lower on Wednesday, potentially providing the first indication that the USD might be about to turn lower against other currencies, too.

But as traders, we must act on what’s in front of us and right now the dollar bears are not getting the signal they are looking for. Therefore, if you are looking for potential long setups on the majors, some confirmation must first be observed.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.