The US Dollar remains on the defensive yet another session, with the dollar index dropping to fresh 4-month lows near 95.80. The currency is losing ground for the fifth consecutive session on Tuesday against the backdrop of speculations on rate cuts by the Fed and the resurgence of risk aversion.
The pick up in the risk-off mood accelerated after President Trump announced a new set of sanctions against Iran at the beginning of the week, all amidst a further escalation in tensions between both countries. Thus, the yields of the US 10-year bonds dropped below the psychological 2.0% mark and keep navigating that area while USD/JPY breached the 107.00 support, recording fresh 5-month lows.
The US Dollar index, which tracks the performance of the greenback against six major currencies, is expected to hold the downside around 95.80. The correction lower in the buck is showing no signs of exhaustion. On the contrary, it gathered further pace after breaking below the key 200-day SMA, the multi-month support line and the 96.00 area.
The sharp decline has so far met decent contention in the 95.80 region, where emerges late February lows ahead of March 20 low at 95.74. In case bulls regain the upper hand, the initial target emerges at the 96.55-96.60 area, where converge the 200-day SMA and the now resistance line.
The governor of the Fed, Jerome Powell, will discuss Economic Outlook and Monetary Policy, while New York central banker John Williams (permanent voter, centrist) will make remarks at a Finance Forum. Today will have also three more speeches by Fed bankers – Raphael Bostic, Thomas Barkin, and James Bullard. Their statements will be watched carefully by the market participants, as potential rate cuts by the Fed remain behind the sharp decline in the greenback, forcing the US Dollar Index to break below important contention areas and enter into bearish territory. In this regard, Jerome Powell’s views on the economy and monetary policy will be key today amidst speculations of an “insurance” cut in July and prospects of a technical recession at some point in H2 2020.
On this background, the EUR/USD pair sees fresh selling and tests daily lows near 1.1380 region amid a broad-based US dollar comeback, as all eyes remain on the Fed Chair Powell’s speech for fresh insights on the US interest rates outlook.
The currency pair EUR/USD is now facing some headwinds just above the critical 1.1400. After moving to fresh multi-month tops beyond the 1.1400 mark during early trade, EUR/USD faced some selling pressure against the backdrop of declining German yields, some political noise around Italy and swelling effervescence on the US-Iran front. Failure to extend the upside momentum further north in the very near term could spark some consolidative mood ahead of a probable correction lower, as emerged from the recent activity in EUR futures markets.
Jerome Powell will speak on the economic outlook and monetary policy in the European evening and hopefully will shed more light on the Fed’s plans in the near term, while the debate among market participants now gyrates around a 25 bps or 50 bps rate cut (in July).
The EUR/USD pair continues to target the mid-1.1400s, or March tops, in the very near term. A convincing breakout of this area is needed to pave the way for another visit to the 1.1500 neighbourhood and 2019 highs in the vicinity of 1.1580. If the bearish mood returns to the markets, the now key support at the 200-day SMA near 1.1350 should offer interim contention.
After leaving behind the 200-day/week SMAs in the mid-1.1300s, the pair now seems to be ready to extend the up move to March tops in the mid-1.1400s mark and beyond.
This important hurdle is considered the last defense for a visit of 2019 highs in the 1.1550-1.1570 area.
USDJPY broke below the 107.00 figure for the first time since the flash crash at the start of the year as Iran hardened its stance stating that no diplomatic solution would be possible. The USD/JPY pair reached 106.70 static support and the overall bias is still bearish below 107.20 hurdle, so a clear break on the downside will challenge 104.60. There is no significant market support between 106.70 and 104.60.
The 107.25 price zone, as the nearest resistance would be the first destination in a bullish scenario. If momentum is strong, USD/JPY could push toward the light HFT selling pressure zone as well which is today noted at 107.46 and above.
The simmering tension between Iran and the US continues to keep markets on edge, but few speculators are pricing a full-scale conflict as neither party appears to be eager to escalate to the next level. In that sense, the current array of rhetorical salvos an isolated military actions looks similar to the North Korean missile test actions two years ago that terrorized the markets for a while but eventually came to be ignored. For sure, the situation in the Strait of Hormuz is geopolitically far more important, but the risk of actual conflict appears to be minor for now.
To that end, the focus in USDJPY could turn towards economic matters as markets pivot their gaze to the G-20 at the end of the week. Although few participants expect any meaningful action in Osaka, there is latent hope that some sort of rapprochement between the US and China can be reached. President Trump especially appears eager for a PR win as he senses that any disappointment will reverberate badly in global capital markets.