The U.S. dollar is holding strong with steady speculative long positions and an outlook for sustained high interest rates.
Key Points
- EUR/USD hovers near a one-year low, pressured by Trump’s policies and inflation concerns.
- GBP/USD is vulnerable as dollar strength continues, and BoE remains cautious about rates.
- USD/JPY rises to 154.95 amid dollar strength and BoJ’s gradual stance on rate hikes.
General Market Overview
The U.S. dollar continues to showcase robust performance, buoyed by steady speculative long positions and a favorable interest rate outlook.
With speculative long dollar positions valued at $17.54 billion, marginally down from last week, investors seem to expect continued dollar strength. This optimism stems from market reassessments of future rate cuts, especially as Federal Reserve Chair Jerome Powell hints that borrowing costs might remain elevated longer than initially anticipated.
Additionally, U.S. President-elect Donald Trump’s proposed policies—focused on reducing taxes and imposing tariffs—are expected to drive inflation, potentially limiting the Fed’s leeway to ease monetary policy further.
Globally, equity markets remain slightly subdued, with a mix of cautious optimism and subdued performance in anticipation of potential inflationary impacts and Trump’s upcoming policy announcements.
The USD index, holding steady at 106.69, is nearing last week’s peak and may aim for the 2023 high of 107.34, reinforced by a positive 14-week momentum. Meanwhile, global investors are also closely monitoring the Federal Reserve’s anticipated actions and statements from central banks in Europe and Japan.
EUR/USD Analysis
The euro continues to hover near its recent one-year low, trading at $1.0547, as the impact of Trump’s election victory ripples through global markets. The possibility of U.S. tariffs targeting European goods has pressured the euro, with investors wary of a potential slide toward parity with the dollar.
Market sentiment leans bearish on the euro as speculation grows around Trump’s potential nominees for key financial positions, including Treasury Secretary.
In the European Union, inflation concerns are also rising as officials grapple with the economic repercussions of Trump’s protectionist agenda. European Central Bank members are closely watching U.S. developments, particularly tariffs that may affect Europe’s trade balance with the U.S. and China.
Given the subdued economic data and a dovish ECB stance, the euro may struggle to recover in the upcoming week unless U.S. dollar momentum wanes or more supportive policies emerge from the ECB. So, from a technical analysis perspective, we may see further dip on the EUR/USD pair today as price has found resistance off the 200 EMA earlier in today’s session.
GBP/USD Analysis
Sterling has faced pressure, trading around $1.2619, as the dollar’s renewed strength has dragged down most major currencies. Since Trump’s election, GBP/USD has dropped approximately 2.5%, reflecting the broader trend of dollar appreciation.
The currency pair remains vulnerable to additional downside, especially with the Bank of England’s relatively cautious stance on interest rate hikes. Meanwhile, inflation data expected from the UK could provide insights into BoE’s future rate paths, though many analysts believe the dollar’s strength will continue to weigh on the pound in the near term.
Looking ahead, if U.S. tariffs are imposed on the European Union, it could have a ripple effect on the UK economy as well, impacting both trade and investment flows. Furthermore, the release of U.K. inflation data later in the week will be pivotal in guiding GBP’s next moves. Without substantial signs of resilience in UK economic data or a softer dollar, GBP/USD may remain pressured in the near term.
On the GBP/USD side, price action shows that the trend is currently bearish. However, the price may shoot to the upside to the nearest flip zone and exponential moving average before continuing its downward movement.
USD/JPY Analysis
Last week, USD/JPY saw gains, climbing to around 154.95, driven by the strong dollar and expectations that the Bank of Japan will maintain a cautious approach to interest rate hikes.
BoJ Governor Kazuo Ueda’s recent comments suggest that while rate hikes are on the table, their timing remains uncertain. This ambiguity, coupled with Japan’s weaker economic performance and BoJ’s dovish approach, has kept the yen under pressure.
The yen’s rapid depreciation since October has attracted attention, with research highlighting the potential for Japanese authorities to intervene if USD/JPY breaches the 160 level.
Market sentiment anticipates a possible BoJ hike to 0.5% at its December meeting if inflation persists, but Japanese policymakers seem inclined to prioritize stability over abrupt policy changes. Investors remain alert to potential intervention signals from the Ministry of Finance, especially if the yen continues its descent.
A closer look at the price action on the USD/JPY shows that the price has crossed and closed above a key level some minutes ago. However, the buy setup is not convincing yet until the price closes above the 200 EMA. So, traders looking to go long should keep a close eye on how price interacts with the EMA before committing to a position.
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