AUD/USD ANALYSIS & TALKING POINTS
US debt ceiling discussions will lead the way this week.
China’s LPR remains steady as growth potential comes into question.
Fed speakers in focus for today.
AUD/USD consolidates as external factors dictate terms.
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AUSTRALIAN DOLLAR FUNDAMENTAL BACKDROP
The Australian dollar looks to be facing another challenging week after US factors weighed on the pro-growth AUD. Beginning late on Friday, Treasury Secretary Janet Yellen addressed bank CEO’s and stated there may be a need for additional mergers due to the slew of bank failures seen over the last few months. This dampened risk sentiment leaving the AUD on the backfoot against the US dollar. Market caution gained traction over the weekend as optimism around the US debt ceiling was quickly dispelled when President Joe Biden mentioned that the demands from Republicans were ‘unacceptable’. President Biden and House of Representatives Speaker Kevin McCarthy will hash it out once more later today as time runs out.

That being said, Fed Chair Jerome Powell relayed a rather dovish statement last week which was largely lost in the debt ceiling shadow, hinting that the Fed may pause their hiking cycle. In summary, the week should be dominated by debt ceiling negotiations but Fed monetary policy should be a close second.

Earlier this morning China kept its 1 and 5-year Loan Prime Rates (LPR) unchanged. The increasing interest rate differential between the US and China has weighed on the Yuan and the PBoC’s desire to cut rates (as a stimulus measure) to meet their 5% GDP growth target. Commodity prices (Australian specific exports) have weakened thus exacerbating downside for the Aussie dollar.

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The day ahead will be led by Fed speakers (see economic calendar below) and it will be interesting to see how the scheduled officials react to Fed Chair Powell’s recent comments.

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Daily AUD/USD price action reveals recent uncertainty in global markets as the pair fluctuates between the 0.6600 and 0.6800 psychological levels. The Relative Strength Index (RSI) further reiterates investor skepticism due to fundamental ambiguity. This week may be a ‘wait and see’ mindset from traders awaiting external cues.

Key resistance levels:

200-day MA (blue)
0.6700
50-day MA (yellow)
Key support levels:

0.6620
0.6565
0.6500
IG CLIENT SENTIMENT DATA: BULLISH
IGCS shows retail traders are currently LONG on AUD/USD, with 73% of traders currently holding long positions. At DailyFX we typically take a contrarian view to crowd sentiment resulting but due to recent changes in long and short positioning, we arrive at a short-term upside disposition.

From Warren Venketas
Analyst

US DOLLAR FORECAST:
U.S. dollar begins the week on the back foot, undermined by concerns over the U.S. debt limit impasse and disappointing economic data
The U.S. retail sales and industrial production reports from April should be watched on Tuesday
In terms of technical analysis, the DXY reverses lower off Fibonacci resistance, failing to follow-through on the topside after a bullish breakout late last week

From Diego Colman
Contributing Strategist

AUSTRALIAN DOLLAR OUTLOOK:
AUD/USD has lacked directional conviction in recent months, with the pair stuck in a consolidation phase
While ranging markets can be predictable, traders should exercise caution ahead of a high-impact event looming on the calendar: the U.S. inflation report
This article looks at potential technical scenarios for Aussie

FROM Diego Colman
Contributing Strategist

US DOLLAR AND NASDAQ 100 OUTLOOK:
The U.S. dollar, as measured by the DXY index, loses ground on Monday, despite the rally in U.S. yields
Meanwhile, the Nasdaq 100 posts moderate losses after failing to clear technical resistance AT 13,370
The U.S. debt ceiling drama and the April inflation report will take the spotlight this week
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Most Read: EUR/USD Price Forecast – Euro Bulls Fight Exhaustion Below the 1.1100 Level

The U.S. dollar, as measured by the DXY, index was a tad weaker on Monday despite the advance in U.S. Treasury yields seen across the curve following better-than-expected nonfarm payrolls data last Friday and higher oil prices over the past two trading sessions.

Meanwhile, the Nasdaq 100 was also subdued, sliding about 0.3% to 13,280, pressured by the rally in bond rates, with upward momentum fading and bulls failing to push the tech index above technical resistance at 13,370 ahead of a loaded economic docket.

Two key events are likely to grab the spotlight this week: 1) a White House meeting between the President and several lawmakers to discuss the U.S. borrowing cap and 2) the April U.S. inflation report.

Focusing on the first item, President Biden will host House Speaker Kevin McCarthy, House Minority Leader Hakeem Jeffries and senior Senate figures representing both ends of the political spectrum on Tuesday to address the impasse over raising the debt ceiling.

With the Treasury Department expected to run out of cash to pay its bills as early as June 1, President Biden needs to negotiate a deal soon to prevent the U.S. from heading toward default, a situation that could prove catastrophic for the global economy and financial system.

Turning our attention to the second item, the U.S. Bureau of Labor Statistics is due to release consumer price index data from the previous month on Wednesday morning. In terms of expectations, headline CPI is seen rising 0.4% m-o-m, keeping the annual rate steady at 5.0%.

For the Fed’s monetary policy outlook to stay dovish, as priced in by Fed futures, inflation must remain on a downward path. Should CPI numbers surprise to the upside, rate cut expectations for the second half of 2023 could fade, boosting yields and the U.S. dollar. This would be bearish for the Nasdaq 100.

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US DOLLAR TECHNICAL OUTLOOK
After the recent pullback, the U.S. dollar, as measured by the DXY index, is steadily approaching technical support at 100.75, near the 2023 lows. If the bears manage to drive the greenback index below this floor, we could see a move toward 99.50 in short order.

On the flip side, if prices get repelled from current levels and turn higher, initial resistance appears at 102.30. A successful climb above this barrier could embolden buyers to launch an attack on the 50-day moving average, followed by 103.50.

US DOLLAR (DXY) TECHNICAL CHART
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NASDAQ 100 TECHNICAL CHART
The Nasdaq 100 rallied aggressively last Friday, but fell short of clearing technical resistance at 13,370, near the 2023 peak. Failure to follow through on the topside appears to be attracting sellers on Monday, with the tech index retreating from its recent highs – a sign bullish impetus may be waning.

If the pullback accelerates in the coming days, the first key support to keep an eye on rests at 13,000-12,950. If bulls fail to defend this floor, we could see a drop toward 12,635 soon. Conversely, if the index resumes its ascent and breaches 13,370, prices could be on their way to test 13,735 imminently.

NASDAQ 100 TECHNICAL CHART
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

From Diego Colman
Contributing Strategist

US NFP AND JOBS REPORT KEY POINTS:
The US Added 253,000 Jobs in April, Surpassing the Average Forecast of 180,000 New Payrolls.
The Unemployment Rate Dropped to 3.4%, Matching the January Print Which was a 50-year low.
The Positive Data Continued as Average Hourly Earnings Increased More Than Expected as Well, Likely to Add to Inflationary concerns.
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Hiring in the US accelerated through April as the economy added 253K jobs in April 2023, beating forecasts of 180K and following a downwardly revised 165K in March. According to the U.S. Bureau of Labor Statistics employment continued to trend up in professional and business services, health care, leisure and hospitality, and social assistance. It is also important to note the overall change in total nonfarm payroll employment for February and March was revised down by 78k and 71k respectively, leaving employment for the two months 149k lower than previously reported.

The unemployment rate, at 3.4 percent, and the number of unemployed persons, at 5.7 million, changed little in April. The unemployment rate has matched a 50-year low which was seen in January and has ranged from 3.4 percent to 3.7 percent since March 2022. The labor force participation rate, at 62.6 percent, and the employment-population ratio, at 60.4 percent, were unchanged in April. These measures remain below their pre-pandemic February 2020 levels (63.3 percent and 61.1 percent, respectively).

Looking more closely at the employment survey, average hourly earnings which remains a powerful inflation gauge for the Fed, increased by 0.5% MoM up from 0.3% in March, bringing the annual rate back to 4.4% from 4.3% previously. This print in particular doesn’t bode well for the Fed in the fight against inflation with two inflation reports ahead of next month’s FOMC meeting.

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FEDERAL RESERVE AND THE WAY FORWARD
The FOMC meeting didn’t disappoint this week while continuing stress among US Regional Banks weighs on sentiment and stokes recessionary fears. Fed Chair Powell for one said he doesn’t see a recession but rather miniscule growth for the US in 2023 even though some of his peers on the FOMC fear a recession is inevitable. The Fed Chairs confidence stemming from the strength of the labor market and low unemployment rate. However, given the increasing jitters around regional banks since the FOMC meeting recessionary fears have risen and the probability of rate cuts in 2023 have increased (By market participants at least).

The Fed did not rule out further hikes completely but given the banking sector stress of late it would seem the peak is in. As we move forward though jobs data will be of particular interest. If the US can keep the unemployment rate from rising too fast, they may be able to achieve Powells vision of marginal growth rather than a recession in 2023. Tighter credit conditions usually leads to higher unemployment which was is why this is a key metric moving forward. The Feds dream scenario would ideally be that tighter credit conditions lead to a slowdown in the economy to put in a dent in inflation while at the same time seeing only a marginal uptick in the unemployment rate.

The Dollar itself remains vulnerable as we hover near YTD lows. The ECB are expected to continue hiking with fellow central banks like the RBA striking a hawkish tone of late and markets unconvinced about the banking sector, the greenback could be in for a tough summer.

Initial reaction on the EURUSD saw the dollar strengthen and gain approximately 30 pips to trade back below the 1.1000 level.

Looking at the bigger picture EURUSD fell from YTD highs yesterday despite a hawkish tone from the ECB. The weekly timeframe was in overbought territory earlier in the week with the H4 timeframe printing a lower high yesterday. Looking at the daily chart above you can see we have closed below the ascending channel for the second time. A push lower could be in store for EURUSD but the 1.0900 handle may prove too strong a hurdle to overcome.

Key Levels Worth Watching:

Support Areas

1.0950
1.0900
1.0845
Resistance Areas

1.1000
1.1075
1.1135
— Written by Zain Vawda for DailyFX.com

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FED DECISION KEY POINTS:
The Federal Reserve raises interest rates by 25 basis points to 4.75%-5.00%, in line with expectations
The policy statement removes guidance indicating that ongoing increases in the target range will be appropriate
The dot-plot signals the same hiking path for 2023 as the one envisioned three months ago
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Most Read: EUR/USD Price Forecast – Is the Panic Over? Sentiment Reversal Lifts the Euro

FOMC MARKET REACTION:
Updated at 2:42 pm ET

Immediately after the FOMC announcement crossed the wires, the U.S. dollar took a turn to the downside, with the DXY index falling more than 0.8%, undermined by the sharp pullback in Treasury yields, especially those at the front end of the curve. This move was prompted by the Fed’s softer guidance, which was less hawkish than previous iterations in the face of the recent banking sector upheaval. All this suggests that the central bank’s hiking cycle is close to its end, a bearish outcome for the U.S. dollar.

Source: TradingView

Original post at 2:25 pm ET

The Federal Reserve concluded today one of its most anticipated meetings in recent memory and voted by unanimous decision to raise interest rates by a quarter of a percentage point to 4.75%-5.00%, largely in line with consensus estimates. This adjustment brings borrowing costs to their most restrictive level since 2007, a sign that the central bank will not relent in its efforts to restore price stability.

Ahead of today’s announcement, Wall Street’s expectations were in flux amid banking sector turmoil in the aftermath of the collapse of two lending institutions and the bailout of Credit Suisse earlier this month. Although market stress has begun to ease after government authorities swiftly unveiled coordinated measures to shore up the financial system, sentiment was still fragile.

In the policy statement, the FOMC noted that the labor market continues to be robust, and that inflation remains elevated. Regarding recent developments related to regional banks, the Fed stated that the banking system is sound and resilient, but underscored that the situation could result in tighter credit conditions for households and businesses, creating downside risks for economic activity, hiring and inflation.

In terms of forward guidance, language indicating that “ongoing increases in the target range will be appropriate” was removed and replaced by “additional policy firming may be appropriate”. While this points to further tightening, it is less hawkish than previous messages, a sign that the hiking cycle is coming to an end. This is likely to be bearish for the U.S. dollar over the medium term.

SUMMARY OF ECONOMIC PROJECTIONS
There were meaningful changes in the March Summary of Economic Projections (SEP) compared to the material presented in December of 2022. For 2023, the GDP forecast was downgraded to 0.4% from 0.5% previously, while the unemployment rate was marked down to 4.5% from 4.6%, a vote of confidence in the labor market despite growing economic headwinds. Meanwhile, core PCE inflation for 2023 and 2024 was revised higher by one-tenth of a percent to 3.6% and 2.6%, respectively. Key details are highlighted in the below.

image1.png
Source: Federal Reserve

FED DOT PLOT
The Fed’s so-called dot plot, which shows the trajectory for interest rates, signaled the same hiking path for 2023 as the one contemplated three months ago, with the median projection steady at 5.1%, implying about 25 basis points of additional tightening through year’s end. For 2024, rates are seen at 4.3% versus 4.1% in December, indicating a little less easing with respect to the terminal rate on the horizon.

Stay tuned for our market reaction analysis

Written by Diego Colman, Contributing Strategist

US DOLLAR (DXY) PRICE AND CHART ANALYSIS
US inflation turns lower but remains at elevated levels.
Banking contagion fears continue to stalk the market.
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Headline inflation (y/y) in the US fell by 0.4% to 6% in February, in line with analysts’ expectations, while core inflation nudged 0.1% lower to 5.5%, also in line with forecasts. According to the US Bureau of Labor Statistics,

‘The index for shelter was the largest contributor to the monthly all items increase, accounting for over 70 percent of the increase, with the indexes for food, recreation, and household furnishings and operations also contributing. The food index increased 0.4 percent over the month with the food at home index rising 0.3 percent. The energy index decreased 0.6 percent over the month as the natural gas and fuel oil indexes both declined.’

image1.png
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US Dollar Grips on as SVB Fallout Brings US CPI into View Ahead of the Fed

The recent bout of banking contagion fear, sparked by the Silicon Valley Bank failure, will remain uppermost in the Fed’s thinking when they announce their latest monetary policy decision on March 22nd. While the central bank’s actions in making depositors whole have eased concerns, the fear that other, smaller, banks are sitting on unrealised bond losses will continue, especially if the Fed continues to hike interest rates. Market expectations for further rate hikes have been pared back sharply in the last few days, but if inflation remains high then chair Powell and his colleagues will have to decide whether to continue to push down on inflation by tightening monetary conditions or to wait and see if prior rate hikes start passing through the system and dampen price pressures.

The US dollar slipped 15 pips after the release before recouping these small losses and trading flat. The US dollar is currently battling contrasting forces of banking contagion fears and lower US Treasury yields and remains highly volatile.

From Cawley, Senior Strategist

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