After nearly a year of downside pressure on the dollar, we have finally begun to see relief in the world reserve currency. This comes as we see a massive rise in yields & Jerome Powell admitting we may have further inflation on the horizon, although he states the Fed will not react to rising rates.
As of 5 February, price has broken structure, creating higher highs and higher lows. After surpassing the 106.000 key level, we have seen massive buying momentum on the dollar as the DXY soars past 91.50 handle.
As we can see above, the DXY has reached key support last week Friday, bottoming out around 89.750. This higher low formation on the DXY and buyers stepping in can be translated to USDJPY as we had the daily break & retest of 106.000 followed by a bullish run into 108.320 at the time of writing. The psychological key level of 108.000 is a crucial level to observe closures. Should we close above, we will be looking for price to stabilise and continue towards 110.000, closures below may allow a retracement before a continuation.
Applying a fib, we have a 78.6 retracement on the DXY as we head towards our first target inline with prior support which may react as resistance. The next upside target on the DXY is the 93.00 handle.
Looking at covid cases, we have seen a decline heading into 2021, providing optimism for the dollar as we see the reopening of the economy become a main theme. Powell reiterates we are a long way away from FED goals, however we seeing massive pricing in towards a higher GDP growth number this year. Many analysts believe we can see 7% growth this year. Vaccinations has not been as successful as other G7 countries such as the UK, however we have optimism surrounding further support for vaccination funding & roll outs.
All eyes are on the Non-Farm Payroll data releasing today. Forecasts are almost 4x the prior months data however, we anticipate a softer number which could reflect a longer recovery period. Unemployment is at 6.3% with forecasts staying the same. Powell stated 4% unemployment would be a good number to have and would show significant progress, however this would still be far away from max employment.
With further stimulus on the cards towards the end of the month, we may see an inflation in the dollar price before we see the market flooded with bonds & dollar printing, dragging the US Dollar lower.
With major fundamentals on the horizon, it is crucial to exercise risk management & we hope you had a great trading week! For more articles like the one above, subscribe to our blog for updates delivered directly to your email so you never miss the market moves.