Over the past couple days, the USD has retraced considerably from the highs as the dollar index is lower by another 1% today. A couple of things have signaled that dollar strength has peaked, but USD bears should not be too quick to switch sides just yet. There are still warning signs ahead for the risk-on traders.
Recent jobs data in the US suggests that the Fed may want to slow their aggressive moves for tighter monetary policy to let the economy improve. Recent unemployment claims missed the mark by 18,000 as analysts were already expecting a higher number of claims than last week.
The chart above shows actual and forecasted claims from 2021 and 2022. The past six weeks have reported a higher actual number than what was in the forecast. This could eventually lead to a push towards a more dovish stance by the Fed which will lead to less aggressive rate hikes over time. However, it's never a good idea to assume that such a change is going to happen even if signs are present.
Risk-Off Warning Ahead
The cost of goods and services has seen the highest increase in the past 40 years as businesses struggle to catch up to higher wages. Too many signals like the lack of Fed intervention, high inflation, war in Ukraine, higher bond yields, tighter monetary policy; they are all adding to extreme levels of volatility. The problem now is when things will begin to subside and sentiment towards expansion will continue.
It's too early to tell. I wouldn't be punching the gas on bullishness and risk-on just yet. Although we've seen a considerable retracement from the USD highs, there is still a lot in the way. If anything, it looks like another opportunity to get back into long positions on the USD. Here are a few pairs that could have potential in the dollar's favor.
USD Pairs To Watch
GBPUSD flew up 1.30% on the day as price still hangs around the resistance level on the 1D timeframe. Recent price action may suggest a higher move, but that may only be a setup for more bearish moves to come. More resistance lies in the way around the 1.26400s and the 50 DMA right above that, but price needs to break and close above the current level for this to seem likely.
USDJPY struggles to move higher as the pair forms lower lows on the 1D. However, clean support lies just below at around the 125.100s which is also paired with the 50 DMA. For investors still long USD, this could be a decent opportunity to enter another long position on the dollar. The extremely harsh move to the upside from March suggests that price could be set to continue on this move but is only retracing for long setups.
AUD/USD is breaking above resistance and shows a strong move to the upside similar to GBPUSD. However, price is now about to face clean resistance around 0.70859. It looks like a move higher will likely happen, although it's important to watch for the same kind of volatile move back to the lows. A failed break at this current resistance level may be a sign for more downside.
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