The US dollar has made an impressive comeback so far in February.
After hitting a 10-month low, the US dollar index — a measure of the greenback against a weighted basket of major currencies — is up more than 1.7 percent to erase all of its January losses.
The greenback was buoyed by a string of strong US data points this month.
January payroll data showed more than half a million job creations, nearly triple market expectations.
This was followed by last week’s US inflationary pressures, which showed prices were still stubbornly high at 6.4 percent year-on-year, a smaller decline than markets were expecting.
With US data still hot on all fronts, market participants are positioning for a more hawkish Federal Reserve, which looks increasingly likely to maintain its current rate-hike stance.
Futures markets are suggesting rates will peak at over 5.2 percent this year, up from 4.9 percent in early February.
This suggests that the dollar rally is likely to be further consolidated by the end of the first quarter.
As always, US data points require close scrutiny – and comments from the Fed and its Chair Jerome Powell will be paramount.
Minutes of the Federal Open Market Committee meeting on the February 1 Fed rate decision will be released on Wednesday.
Keep in mind that some members had called for a 50 basis point hike during the March meeting – and if minutes support that view, we could be in for another round of dollar buying.
That will be followed by the U.S. gross domestic product (GDP) aggregate data due Thursday (Q4 GDP is expected to come in at 2.9 percent year-on-year) and the Personal Consumption Price Index, the Fed’s preferred measure of inflation, scheduled for 5.30pm Dubai time on Friday.
While many on Wall Street do not foresee a continuation of the strong run in US data points, there is some steam in the current rally and these data points need to be watched.
Technically, I expect the US Dollar Index to continue its consolidation in the current channel and maintain a mildly bullish bias through the end of March.
Support at 103.75 must hold with short-term upsides capped at 104.75/105.00 over the next two months.
Gold prices were quite choppy during the month. After peaking at $1,960 in early February, the precious metal slipped below $1,850 on a stronger dollar.
Gold will remain volatile in the coming weeks – driven by the US economy and resulting Fed policy.
Technically, good support comes in at the 100-day exponential moving average at $1,818, which needs to hold before a talk of $1,800. On the upside, $1,853 will be a difficult level to break.
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Much of the euro’s weakness is due to a rally in the US dollar
Gaurav Kashyap, Risk Manager, Equiti Securities Currencies Brokers
Across the Atlantic, the euro’s prospects paled on the back of dollar strength. The shared currency slipped more than 1.6 percent against the dollar in February, finding support at 1.06.
Much of the euro’s weakness can be attributed to a rally in the US dollar. However, a closer look at the euro data points would suggest that the euro area recovery is not as robust as expected.
Despite the cut in energy prices, which was a major theme last year, the latest data showed that retail sales continued to fall.
German export data remains weak, which would also suggest that demand inside and outside the region remains difficult.
EUR/USD outlook would point to downside towards 1.0530 in the coming months.
Overall, markets remain in limbo in anticipation of Fed policy.
The price action in February has taught us that we are not out of the woods yet – January’s optimism must be scaled back.
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For shorter-term traders, volatility and current ranges can present opportunities.
However, perhaps it would prove prudent to wait and see before entering into longer-dated position trades.
Gaurav Kashyap is Risk Manager at Equiti Securities Currencies Brokers. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti Securities Currencies Brokers
Updated February 22, 2023 4:00 am
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