Dollar picks up supported by rising US yields

Important Calendar Events

• EUR: German Monthly CPI, European Central Bank Current Account
• USD: Building Permits, Housing Starts
• GBP: Release of yearly CPI, monthly PPI Input and Output, BOE Gov Bailey Speech
• All currencies: World Economic Forum Annual Meeting

USD

The USD was supported on Tuesday by rising real yields, with 2-year and 10-year yields hitting a 2-year high. Rising yields in the US and speculation that the Fed will adopt an even more aggressive hawkish stance than previously anticipated, have bolstered the USD. The dollar index, which has remained relatively low for almost a week, rose to a six-day high of 95.83.  

Even though the surge of Omicron cases is putting pressure on the US economy, investors are mostly expecting this effect to be a temporary setback and the economy to go back on track before long. It remains to be seen whether the Fed will consider the resurgence of Covid-19 as transitory and if it will go ahead with the decision to shift to a more hawkish policy as anticipated.  This week no major announcements are scheduled for the dollar and investors will probably focus on the upcoming FOMC January two-day meeting on January 25-26, which is expected to shed more light on the Fed’s monetary policy.

US indicators that are scheduled to be released today include: Building Permits and Housing Starts.  These are indicators of economic health, but are not expected to cause high volatility in the currency. 

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EUR 

On Tuesday, the ZEW Economic Sentiment and the German ZEW Economic Sentiment were released, which were unexpectedly positive for the Eurozone economy. The upbeat economic data had little effect on the Euro though, which retreated again on Tuesday against the USD, as rising yields in the US bolstered the dollar. EUR/USD dropped to 1.131 on Tuesday, close to its lowest value of 1.128 in a week. If the currency pair goes up again, it may find resistance at 1.148, while if it declines, support may be found at 1.128.

On Wednesday, the German Monthly Consumer Price Index and the European Central Bank Current Account are scheduled to be released and may cause some volatility in the Euro, although high volatility is not expected from the release of this data.

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GBP 

In the UK, pressure is mounting on Prime Minister Boris Johnson to resign, after revelations that he broke lockdown regulations by attending a “bring your own bottle” party in May 2020. Rising political instability in the UK though, has not affected the sterling considerably up to now. The conclusion of the Cabinet Office’s ‘partygate’ inquiry this week might force Boris Johnson to end his premiership though, putting the pound under pressure. 

Unemployment rates released on Tuesday showed that unemployment is on the decline in the UK and Unemployment claims were also lower than expected, with UK employers adding a record of 184,000 new jobs. The impact of Omicron on the British economy seems to have been less severe than anticipated and the economy is starting to recover. High inflation rates and low wages are a problem though, and increase the chance that the BOE will announce a rate hike at its February 2nd meeting.

The dollar rose on Tuesday and the GBP/USD rate fell as low as 1.357 on Tuesday, but started to pick up again later in the day. If the GBP/USD climbs again, there may be resistance at the 1.375 level, and if the GBP/USD price falls, it may find support at 1.352.

There are important calendar events scheduled for Wednesday for the GBP.  The yearly Consumer Price Index will be released on Wednesday morning, which is considered the UK's most important inflation indicator, because it is used as the central bank's inflation target. Later on Wednesday, BOE Governor Bailey is due to testify on the Bank of England Financial Stability Report before the Treasury Select Committee. Traders will follow his speech closely to gain insight into the BOE’s future monetary policy.  

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JPY 

The JPY exhibited increased volatility on Tuesday morning. Reports that the bank of Japan might reconsider its ultra-accommodating policy had built anticipation that the BOJ’s report released on Tuesday might contain hints of a hawkish shift in Japan’s monetary policy. BOJ Governor Haruhiko Kuroda, however, dashed trader’s hopes of a rate hike, stating decisively that the central bank had no intention of raising interest rates. The BOJ also revised its inflation forecast for fiscal year 2023 to 1.1% from 1.0%, with Kuroda appearing content for inflation to stay below its 2% goal for years.

The JPY rose early on Tuesday following the BOJ’s announcements and USD/JPY climbed to over 115, as investors were expecting a change in the Central Bank’s monetary policy. It fell again however during the day and the currency pair is currently trading along its downtrend at the 114.5 level and the outlook for the pair is slightly bearish, although that may change if the dollar picks up in the following days. If the currency rate continues falling, it may find support at 113.48, and further down at 112.55. If the pair starts recovering, resistance may be found at 115.95, while the 116 level may present another resistance point. The JPY is expected to settle to its previous levels in the following days and investor’s focus will turn once again on the Fed’s monetary policy and the US central Bank’s 2-day meeting next week. 

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Written by:
Myrsini Giannouli

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