Dollar Rally Gains Momentum as European Majors Falter

Dollar’s rally is gaining significant traction today, as major European currencies face increasing selling pressure. The break of last week’s lows in both EUR/USD and GBP/USD pairs suggests that the greenback’s rise is poised to extend further in the near term. However, the sustainability of this rally will largely depend on market reactions to critical upcoming events, including FOMC rate decision and pivotal economic indicators like ISM manufacturing index and non-farm payrolls.

Investors are keenly anticipating Fed’s next moves, with expectations high that Fed will signal impending rate cuts in September. Moreover, there is growing speculation that Fed might indicate the openness to implement back-to-back rate cuts in September, November, and December. However, if Fed Chair Jerome Powell adopts a more cautious tone, it could lead to investor disappointment, resulting in a decline in stock markets and a stronger Dollar as a safe-haven asset.

As of today, Dollar is the strongest performing currency followed by Loonie and Aussie. On the other hand, Euro is the worst performer. Kiwi and Sterling are also underperforming. In the middle of the performance spectrum, Swiss Franc and Yen are Holding Steady.

In Europe, at the time of writing, FTSE is up 0.88%. DAX is up 0.29%. CAC is down -0.35%. UK 10-year yield is down -0.072 at 4.032. Germany 10-year yield is down -0.051 at 2.357. Earlier in Asia, Nikkei rose 2.13%. Hong Kong HSI rose 1.28%. China Shanghai SSE rose 0.03%. Singapore Strait Times rose 0.52%. Japan 10-year JGB yield fell -0.0333 to 1.029.

Nikkei rebounds on short covering, but downside threats remain

Nikkei rebounded strongly during Asian session, closing up by more than 800 points or 2.13%. This marked the index’s first day of gains in nine sessions, following a three-month low last week. The stabilization in US tech stocks on Friday helped calm investor sentiment, while Nikkei also found stability as Yen consolidated its recent gains ahead of BoJ meeting later this week.

However, today’s bounce appears to be driven largely by short covering in anticipation of key events. There is a risk that BoJ may raise interest rates this week, which could strengthen Yen and subsequently pressure Nikkei. Meanwhile, Fed might start signaling a rate cut in September, but market reactions remain uncertain as this is already largely priced in.

Technically, Nikkei is probably just trying to fill the gap left on last Thursday. Near term risk will stay on the downside as long as 55 D EMA (now at 39398.18) holds. Further fall is expected to 38.2% retracement of 25661.89 to 42426.77 at 36022.58, which is close to 55 W EMA (now at 36206.32) before having enough support for a sustainable rebound to set the range for medium term consolidations.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0843; (P) 1.0855; (R1) 1.0869; More…..

EUR/USD’s fall from 1.0947 resumed by breaking 1.0825 temporary low and intraday bias is back on the downside. Sustained break of 55 D EMA (now at 1.0815) will argue that whole rebound from 1.0601 has completed with three waves up to 1.0947. Deeper decline should then be seen to 1.0601/0665 support zone next. Nevertheless, break of 1.0869 will bring retest of 1.0947 resistance instead.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern that’s still be in progress. Break of 1.1138 resistance will be the first signal that rise from 0.9534 (2022 low) is ready to resume through 1.1274 (2023 high). However, break of 1.0665 support will extend the correction with another falling leg back towards 1.0447 support.

Economic Indicators Update