USD/CHF looks set to lead the USD index higher, EUR/USD and AUD/USD lower

Price action has been on the scrappy side for forex majors this week so far, excluding the New Zealand dollar due to a surprisingly hawkish RBNZ meeting. Any hopes of a slight dovish twinge in today’s RBNZ meeting were quickly dashed, as the minutes revealed that the RBNZ actually discussed hiking rates at this meeting. Whilst the OCR was held at 5.5%, they warned that the cash rate may need to “remain at a restrictive level for longer than anticipated” than in their February monetary policy statement. This saw NZD/USD quickly spike 0.85% and rise against all of its FX peers.

I personally doubt the RBA will go on to hike their cash rate again this cycle, but the tone of the meeting clearly caught most (myself included) by surprise. And serves as a reminder that the RBNZ do not muck around when it comes to saying what they think.

UK inflation and FOMC minutes are the main events for the European and US session. As mentioned in prior articles, I doubt the minutes will provide more information than recent economic data or Fed comments have after since the Fed’s last meeting. On one hand, softer NFP and inflation data excited markets for potential cuts, yet Fed members have been pushing back on imminent rate cuts. Just over the past 24 hours, four members did just that – which I have summarised below.

Still, Fed fund future imply a 51.5% chance of a cut in September, or an 87.59% chance of a cut arriving by November.

Comments from Fed members over the past 24hrs [my interpretation]

Mester:

• Expected above trend growth for the year [hawkish]
• Current level of policy may not be as restrictive as it might have been [due to raising estimate of long run neutral rate]
• Need to see a few more months of inflation coming down [before considering cuts]

Collins:

• This is a period where patience really matters [don’t expect cuts soon]
• Number of factors are keeping the labour market strong [cuts not arriving soon]
• Neutral rate may be higher [hawkish]

Waller:

• I just don’t see rate hikes happening [neutral, not hawkish - as we knew that]
• Progress to 2% inflation may be a lot slower than we thought last year [pushback on imminent rate cuts]

Bostic:

• Not in a hurry to cut rates [don’t expect cuts to arrive soon]
• Would sooner wait longer to cut rates [as above]
• Would not expect a rate cut before the fourth quarter [at the earliest, possible 2025]

Given the lacklustre response to the Fed pushing back on rate cuts on Tuesday, perhaps the US dollar can find time to react today. And looking across some of the FX majors, my bias today is for USD strength. 

USD index, USD/CHF, EUR/USD, AUD/USD technical analysis:

As mentioned yesterday, my bias is for the USD index to head for 105 over the near-term. The 4-hour chart shows prices grinding higher with a series of higher lows below 104.68 resistance, a break above which brings the 105 resistance zone into view.

As the euro accounts for ~57% of the US dollar index, a lower USD index should push EUR/USD lower. At a minimum my bias is for prices to head down towards the 1.0835 low / bullish trendline, a break of which brings 108 into focus for bears.

I have at times found USD/CHF to be an excellent lead on the US dollar index (and therefore EUR/USD). So I find it quite interesting that USD/CHF is trying to break above its consolidation after a strong rally from 0.9000. A break above resistance brings 0.9150 into view, or the high-volume node at 0.91650.

AUD/USD is forming a potential head and shoulders pattern on the 4-hour chart. Bears could enter around current levels on the assumption the high of the ‘right shoulder’ has been seen, and seek a quick short towards the 0.6630 low, or if looking for a larger move hang on in hopes it reaches the projected target around 0.6508.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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