FX Update: USD pummeled anew. Important sessions ahead for sterling.

FX Trading focus: USD continues to struggle, but zooming out important. UK focus next two sessions.

The US dollar continues to stumble, with EURUSD trading above 1.0400 this morning and strong new highs in AUDUSD as discussed in the AUDUSD chart caption below. The latest driver was another strong blast of risk-on overnight in Asia, as markets there celebrated the friendly tone in statements from both sides after the Xi-Biden summit and the warning against any power threatening the use of nuclear weapons. Headlines touted “dovish” talk from Fed Vice Chair Lael Brainard yesterday, although her comments were quite measured and merely confirm what the market is pricing anyway, namely a step down to a hike of 50 basis points in December. At the same time, Brainard included the comment that “I think what’s really important to emphasize, we’ve done a lot, but we have additional work to do.” At the moment, the USD is lower chiefly on the melt-up in sentiment rather than any new lowering of Fed expectations. If we go out to the June 2023 3-month EuroDollar STIR future, it is trading five basis points below last Thursday’s close.

Stronger fundamental headwinds for the US dollar would likely require a poke from incoming data. That includes today’s PPI, not normally a market mover, though a significant shocker in either direction could get more attention than usual, given how far this market has traveled in recent days. The October US Retail Sales report tomorrow will carry a bit more weight, but incoming data watching takes considerable time to accumulate evidence. Eventually, weaker data has to mean traditional end of cycle phenomena like credit stress and weaker asset markets, but the market only has eyes for China opening hopes and US yields. We will need some kind of market that suggests a shift before pushing back too hard against this backdrop. Also, if we zoom out on something like the EURUSD chart, it is still rather remarkable how little damage has been done to the massive downtrend from late last year. The 38.2% retracement of that entire move doesn’t come in until just above 1.0600, an interest area as that is near the major 2020 post-pandemic outbreak low at 1.0636. Still, we have touched the 200-day moving average at 1.0430 today, the first touch since June of last year, a major milestone.

Chart: AUDUSD
AUDUSD is bulling up into a pivotal Fibonacci retracement, the 61.8% of the down-wave from the 0.7137 top just a scant few pips above this morning’s highs. This last leg of the rally has been driven by very strong risk sentiment in Asia on hopes that China is set to come on-line with more stimulus, given weak economic data overnight. As well, the friendly tone in statements from both sides after the Xi-Biden summit was a boost to sentiment. Still, Australia will prove far more sensitive to the RBA’s rate rises, which continue to lag the Fed’s. The RBA is rightly concerned about the coming impact to household budgets from rising mortgage payments as the majority of Australia’s mortgages are floating-rate, so even after a sharp mark-down in Fed expectations since last Thursday has failed to tighten the AU-US 2-year yield spread much. A more interesting test for AUDUSD somewhere down the road would be a backdrop of slightly lower yields on concerns about an incoming inflation and an equity market/risk sentiment that are in the dumps on concerns for the economic outlook. Instead, we have falling yields combined with a wild sprint higher in risky assets, particularly in Asia – a mix that will likely continue to support AUD as long as it lasts. Looking higher, the bigger structural level is perhaps 0.7000, a huge level in recent years, while the 200-day moving average comes in a bit below that level near 0.6950. Bears have nothing to go on here tactically, only a powerful pattern reversal would provide a trading hook, with a fall below 0.6500 needed to begin reconfirming the downtrend.