The US dollar continues to strengthen

US dollar rises after Powell testimony

The US dollar continued its upward march overnight, sending a warning sign to equity markets about “buying the dip.” On Tuesday, Federal Reserve Chairman Powell testified on Capitol Hill, where he reiterated his easy policy mantra and called for more stimulus. Despite Powell’s dovish testimony and strong US data, as well as a strong performance by equities, the dollar index rose again, climbing 0.60% to 93.78. Notably, the index has also increased this morning, breaking significant resistance at 94.00 on its way to 94.11.

In the major currency space, EUR/USD has broken through support at 1.1700, falling to 1.1685. A daily close below this level tonight signals a deeper correction to 1.1450 is possible. Similarly, GBP/USD has fallen to 1.2730, just above its 100 and 200-day moving averages (DMA’s), at 1.2720 and 1.2725 respectively. A daily close below this support zone again signals a deeper correction is upon markets, initially targeting the 1.2500 regions. AUD/USD fell 0.75% on its way to two-month lows at 0.7140 this morning. AUD/USD now targets its 200-DMA at 0.7000.

With developed market currencies weakening overnight, the PBOC fixed the CNY lower today at 6.7986 versus the US dollar. That has spilt over into regional currencies, which are all tracking slightly lower today. In comparison to the G-10 universe, though, local Asian currencies continue to show resilience. If the PBOC’s hand remains stayed, we expect that outperformance to continue.

The USD/JPY has risen back above its 105.00 pivot point to 105.10 this morning. Combined with the strength in the US dollar index, currency markets are giving a significant warning sign to other markets that they buy everything trade’s correction may not yet be over. In particular, G-10 currencies across the board, including CAD and NZD, which I did not mention, look poised to experience more downside pain, most especially those labelled as “pro-cyclical.”