The uptrend of the US dollar (DXY) that started in mid-2021 faces some uncertainties in August 2022, with the US annual inflation rate in July falling more than expected (8.5% from 8.7%), raising concerns speculation about a possible slowdown. the pace of Federal Reserve rate hikes in the coming months.
Meanwhile, the other major central banks, which began normalizing interest rates later than the Fed, are still in the midst of a rate hike cycle, which could further erode the dollar’s advantage over peers.
However, the United States appears to be better equipped to weather an impending global economic slowdown due to its strong labor market, while other parts of the world, such as the Eurozone and the United Kingdom, are expected to suffer from soaring energy prices. and falling real incomes. Therefore, widening growth gaps between the US and the rest of the world, as well as rising geopolitical risks in Ukraine or Taiwan, could still be supportive factors for the US Dollar.
Let’s take a look at what’s happening in the forex market by analyzing the charts to identify the most recent trends and trading signals in the five most important currency pairs.
Chart analysis of the euro against the US dollar (EUR/USD): the fears relating to the parity have not disappeared
The Euro (EUR/USD) is still stuck in a major downtrend against the Dollar, which started in May 2021.
After reaching the parity level (1.00) in mid-July 2022, the single currency hinted at a rebound towards the dynamic resistance of the 50-day moving average, where it encountered strong selling pressure. Since the end of February 2022, the 50-dma has been an important technical obstacle to overcome for the EUR/USD pair.
The yield spread between the German 2-year government bond and the US Treasury of the same maturity remains largely negative, indicating that monetary policy divergences between the Fed and the ECB persist. The market believes that the ECB cannot go too far beyond the Fed in raising interest rates, amid fears of an impending recession in Europe due to the energy crisis and the surge of inflation.
The daily RSI attempted to break above 50 at the end of the first week of August, but was unable to break above 60, indicating that buyer conviction is not particularly strong. Fibonacci retracement levels from 2022 highs to lows show first resistance at 1.03 (78.6%) followed by 1.0557 (61.8%).
However, the most recent EUR/USD price action failed to decisively break through the 1.03-1.035 range. This could be a sign of a bear resurgence in the near term, which would likely push the pair back to test the parity levels.
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Chart analysis of the British pound against the US dollar (GBP/USD): the bears remain in control
Since June 2021, the British pound (GBP/USD) has been on a downward trend against the dollar, with declines intensifying in 2022.
GBP/USD hit a low of 1.175 in mid-July, the lowest value since March 2020, before attempting a recovery to 1.2285, where it collided with the descending channel trendline.
Cable’s brief rally in the second half of July was mainly due to a broader weakening of the dollar rather than a strengthening of the pound.
The Bank of England (BoE) raised the benchmark rate by half a percentage point to 1.75% at its August meeting, the biggest UK rate hike in 27 years, in response high inflationary pressures caused by the recent gas crisis in Europe. The BoE, however, forecast inflation to peak at 13% in October this year and warned that the UK could enter a prolonged recession in the fourth quarter.
The lackluster economic picture in the UK has effectively dampened the appreciation of the pound against the dollar.
The short-term rate differential between gilts and 2-year Treasuries has not increased significantly, indicating that the market is pricing in a longer rate hike cycle in the US than in the UK. United, due to deteriorating macroeconomic conditions in the latter.
Technically, attempts to break the 50-day moving average did not result in upward price action extensions, providing false bullish signals. Declining channel resistance at 1,228 held, triggering the return of sellers, with the RSI resuming its downtrend after a brief rally above 50.
The next support targets are 1.20 (psychological), 1.1891 (July low) and 1.1760 (2022 low). Bottom line, the dollar seems to have the upper hand over the pound right now, both fundamentally and technically.
Chart analysis of the US dollar against the Japanese yen (USD/JPY): temporary relief, but not a game changer
The dollar-yen pair (USD/JPY) has attracted traders’ interest in 2022, due to the sharp depreciation of the yen, which lost 17% against the dollar in the first half of the year.
The remarkable USD/JPY rally peaked at 139.4 in mid-July, the highest since 1998, before losing momentum and starting to fall. Fears of a global recession and the possibility that US inflation may have peaked fueled the yen’s brief respite.
However, as long as the monetary policy gap between the Federal Reserve and the Bank of Japan persists, this cannot be considered a USD/JPY trend reversal. The Fed has yet to signal a slowdown in the pace of interest rate hikes as markets bet on that possibility, while the BoJ continues to maintain ultra-loose monetary policy by keeping interest rates at zero.
The yield spread between 2-year treasury bills and 2-year Japanese government bonds remains wide and close to June highs (3.5%), indicating that the market believes that interest rates US interest rates will remain well above Japanese rates for the foreseeable future.
Technically, the 50-day moving average broke below USD/JPY, which then failed to rise above it. Lower buyers were found at the price supports located at 130.4 and 131.8, preventing further decline in the pair.
Therefore, in the absence of significant catalysts, such as a dovish turn from the Fed or a hawkish turn from the BoJ, both of which seem unlikely at this stage, we could see a sideways market phase with the USD. /JPY between the support level of 131.7 and the resistance. area between 136.5 and 137.
Chart analysis of the US dollar against the Swiss franc (USD/CHF): the first signs of a new downward trend?
The last few months for the dollar-Swiss franc (USD/CHF) exchange rate have been a roller coaster ride, with successive phases of decline and expansion.
The annual inflation rate in Switzerland was 3.4% in July 2022, as in June, remaining at the highest level since October 1993 and well above the 2% target. At the same time, the unemployment rate is still at a record level of 2.2%, which allows a sustained pace of interest rate hikes.
The Swiss National Bank (SNB) unexpectedly raised interest rates by 50 basis points at its July meeting and is expected to do so again in September, bringing the key rate back into positive territory for the first time since July. 2011.
The most prominent chart pattern on the USD/CHF daily timeframe was the bearish double top reversal pattern, which formed in mid-June after the pair hit its second high at 1.006. Subsequently, USD/CHF began its descent towards the neckline support zone at 0.95-0.955, which saw a bottom buying behavior emerge.
During the first half of July, there was a temporary rally that hit with the resistance provided by the 23.6% Fibonacci retracement from the 2022 highs to the lows.
Since mid-July, however, the decline in USD/CHF has been more convincing. First, it broke through the 50-day moving average, then it broke through the 200-day moving average defense, which had been very strong momentum support over the year.
The pair also fell below the 61.8% Fibonacci retracement level, which could mark the end of the uptrend. A declining channel has formed, and the pair may first target support at 0.93 (78.6% Fibonacci) before attempting to test the 2022 lows at 0.90.
The alternative scenario envisions a short-lived downtrend followed by a consolidation phase in the narrow range between 0.93 and 0.958 (50% Fibonacci).
Chart analysis of the Australian dollar against the US dollar (AUD/USD): Out of the woods?
The exchange rate between the Australian dollar and the US dollar (AUD/USD) has been moving in a declining channel that has been in place since September 2021, despite the overshoot that occurred between March and April 2022 which took the pair to 0.765.
Since then, the Australian dollar has plunged 13% against the greenback, reaching its lowest since the start of the year at 0.668 in mid-July. There, the bullish RSI divergence triggered the short-term downtrend reversal, as AUD/USD made new lows as the indicator rose.
Recently, AUD/USD was able to break above the 50-day moving average, albeit with some uncertainty, and project itself up to the 200-day test, which represented fierce resistance in early June.
The Reserve Bank of Australia (RBA) supported the Aussie by raising the cash rate by 50 basis points for the second consecutive time to 1.85% at its August 2022 meeting. The RBA pledged to tighten further, but not on a predefined path, forecasting inflation slightly above 7% in 2022 and 4% in 2023.
The bleaker global growth outlook following the war in Ukraine and escalating geopolitical tensions between China and the United States over Taiwan are short-term negative catalysts for the Australian dollar. But the possibility of commodity prices firming, due to supply chain disruptions, and the slowing pace of Fed hikes could benefit the Aussie.
On the daily chart, it’s also worth keeping an eye out for the 50% Fibonacci retracement (2022 lows and highs) at 0.718. If the AUD/USD breaks through this threshold decisively, it could mark the start of a new uptrend. Any pullback, on the other hand, would keep the long-term declining channel in place.