Dollar struggles to find any love

The world’s premier reverse currency is now down around 4% off its peak from early March just before the banking blow-ups.

Economists talk about the “dollar smile” – the USD tends to do well when things are very bad or very good, but it tends to gently sink on any conditions in between.

Markets are currently enjoying more settled financial conditions with measures of FX and bond volatility falling.

This has meant the greenback is back to reconnecting with narrowing interest rate differentials as markets question what the Fed does going forward while other major central banks like the ECB and the Bank of England are still seen staying on the policy tightening path with more rate hikes in the coming months.

Traders have moved back in favour of no move by the Fed when it next meets in the first week of May.

But these odds have been moving around a lot and are still not far off a coin toss.

This week’s disappointing US data has certainly promoted USD selling with yesterday’s big dip in the JOLTs job openings report putting an even bigger spotlight on a potentially softer labour market and growth expectations going forward.

Today sees the release of the ISM services sector numbers which are seen moderating although they are expected to remain solidly above the key 50 level which denotes expansion and contraction.

We also get ADP job numbers though these are statistically not a very good predictor of the NFP headline print which will be the focus on Friday.

 

GBP smashes through 1.25 resistance

Cable surged yesterday to its highest level since last June. There was no fresh ecoonomic data but the softer dollar and comments from a BoE official helped the major push beyond key resistance around 1.25.

Huw Pill, the bank’s chief ecoonmist, said that policymakers still cannot be sure that it has raised interest rates enough to tame inflation. He voted last month to lift rates to 4.25%, the bank’s eleventh increase since the start of its hiking cycle in December 2021.

Money markets currently forecast over 50bps of additional hikes by September, before the bank stops tightening policy.

This pricing contrasts sharply with the Fed’s expected rate path with cuts priced into the dollar interest rate curve later this year.

The peaks in GBP/USD around 1.24516 from late 2022 and Febuary look to have been broken.

A weekly close should certainly confirm this.

A long-term move towards the 200-week simple moving average above 1.28 could be on the cards with various trends signals pointing to more upside.

Immediate support may be found along the 1.24516 resistance-turned support line, where also lies the 61.8% Fibonacci level from GBPUSD’s 2022 peak-to-trough price action. 

Stronger support may be found at the early-December cycle high of 1.23444, followed by the mid-February top is 1.22699.