Dollar continues to fall after the Fed “pivot” is supported by US data

Updated July 29, 2022


Headlines

*USD wallows near six-week low to yen on view Fed to slow hikes

*Amazon’s strong revenue and guidance reassure Wall Street

*Apple ekes out revenue growth on iPhone sales and services

*Asian stocks mixed as China shares slide on lack of new stimulus

US equities rose sharply for a second day as investors bet the Fed may not hike rates as much as thought. This followed US GDP data that showed the US economy contracted again last quarter. Earnings also gave a lift to sentiment. The S&P500 jumped 1.21% and the Nasdaq gained 0.92%. Asian markets were more mixed. The Hang Seng slipped into correction territory after falling more than 10% from a June peak. US futures are modestly in the red.

USD is down for a third day today since the FOMC rate decision. The DXY is currently trading just below support at the mid-June high at 105.78. EUR had a choppy day sliding to 1.0113 on recession fears before finding a bid. GBP is trading above support and trendline resistance around 1.12155. USD/JPY has fallen below its 50-day SMA for the first time since March as 10-year US Treasury yields keep moving lower. AUD is pushing to fresh six-week highs.

Day Ahead – Eurozone data next up

It’s the turn of the EU to publish its flash gross domestic product figures, as well as the zone’s monthly inflation estimate. Regional CPI data for German states published yesterday were mixed. But the nationwide print edged up unexpectedly in July by 8.5%. This was driven by an energy supply crisis as a further cut in gas flows from Russia prompted concerns about even higher energy bills.

The deteriorating energy outlook has seen markets take around a quarter percentage point off year-end pricing for the ECB’s policy rate since their hike last week. The core inflation print will be key today as markets seek to justify their expectations of around 100-125bps in additional hikes this year. The euro continues to trade around 1.06. The more it range trades, the bigger the breakout generally might be.

Chart of the Day – USD/JPY plunges as Treasury yields fall

We looked at USD/JPY a few weeks ago as it was printing a fresh high above 139. It looked like it was heading higher with the BoJ remaining uber-dovish and stuck to its yield curve control policy. Meanwhile, the Fed was pushing ahead with a much more aggressive tightening path with the terminal rate towards 3.75%.

This week’s FOMC meeting has changed all of that. The supposed “pivot” by Chair Powell has pushed back rate hike expectations and seen 10-year US Treasury yields fall sharply from near 3.1% last week to 2.66% currently. This is below a widely watched support level around 2.71%. USD/JPY has moved lower in tandem and broken support at 135.16 which becomes resistance. The 50-day SMA at 134.23 becomes initial resistance below this. Bears will target the mid-June low and May high around 131.34/49.

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