FX Weekly update: EUR/USD, USD/JPY, GBP/USD
11:09, 21 February 2023

The US dollar is holding steady this week after the latest round of economic data confirmed the US economy is faring better than expected. Both CPI and PPI came in above expectations with monthly core PPI rising more than the previous month (0.5% vs 0.3%), evidencing the strength in the services sector. Consumer spending also came in above expectations for January as retail sales rose 3% from the previous month, with core retail sales rising 2.3% MoM.
Markets are still undecided on how to react to the better-than-expected given the “no landing” scenario which is now being talked about wouldn’t really be good for the economy in the longer term if inflation rebounds, as it simply delays a recession which is bound to happen, and is actually needed at this point to bring down mounting price pressures.
Because of this, the Us dollar index has been hovering around the 103.50 level as traders try to determine the need for safeguarding their capital given the last few weeks have completely changed the script, which was originally pointing towards a recession in 2023. It’s important to remember that the dollar has been closely correlated to bond yields, which have been moving higher when the Fed is perceived to be more hawkish, which is happening again.
A large part of the stagnation in the dollar index comes from the flattening out in EUR/USD, which seems to be attempting to continue breaking lower but is finding resistance from buyers. That said, there is still a negative bias in the short term and I would expect any advances to find it hard to break above the 50-day SMA (1.0728). Traders who were long last week in hopes that the CPI data would evidence a faster slowdown in inflation likely got hurt and were knocked out pot their positions, finding it hard to find another reason to go bullish. There is likely to be further volatility from the remaining US data out this week, which include GDP and PCE for the 4th quarter because despite it being outdated numbers markets are looking for any reason to confirm the US is in a recession. A move below 1.0610 will cement the bearish move further because despite there being room for reversals higher the question is if they are able to sustain the momentum to get EUR/USD back above 1.0740.

USD/JPY has been another closely watched pair as the Bank of Japan is in the midst of a leadership change. The surprise appointment of Kazoo Ueda a few weeks back saw some renewed momentum for the Japanese Yen as he is perceived to be less dovish than Deputy Governor Masayoshi Amamiya, who was believed to be the likely replacement. So far Ueda has commented on the need to continue the bank’s easing policy, but some analysts believe this could be a strategic play to ensure markets don’t anticipate a widening of the yield curve control (YCC) bands which would create another round of selling in Japanese bonds.
There has also been speculation in recent days about the possibility that current Governor Kuroda could widen the bands himself at his last meeting on March 9th and 10th to make the transition smoother for Ueda, who will face increased pressure to tighten monetary conditions as CPI came in at 4% in December. Ueda is expected to face the parliament this Friday the 24th so it is likely that we see increased volatility in Yen pairs as markets try to get a glimpse into his monetary policy stance before his term starts in April.
USD/JPY is likely to remain sideways until the end of the week in the absence of any material data or events. The pair has been building bullish momentum slowly over the past few weeks and is now hovering around the highs seen in January (134.77) but there is increased resistance around the 135 handle as traders try to asses the direction of the next move. The US dollar remains supported on the basis of a stronger Fed but the Yen is also taking advantage of the possibility of a less dovish Governor, which means there is likely to be a lack of clear direction until we get clarity on either of these fronts. With regards to moving averages, the 20-day SMA (131.68) is closing in on the 50-day SMA (131.85) whilst the 100-day SMA (137.45) is nearing the 200-day SMA (136.96) meaning that short-term momentum is pointing higher but it the longer term is looking weaker for USD/JPY.

Similar to USD/JPY, GBP/USD is also facing key SMAs crosses but they are suggesting short-term weakness but longer-term bullish momentum. This can be evidenced by the 20-day SMA (1.2166) about to cross below the 50-day SMA (1.2163) and the 100-day SMA (1.1915) about to cross above the 200-day SMA (1.1935). In fact, the pair has been pretty range bound between these lines for the past two weeks, with a few dips below the psychological 1.20 line.
We seem to be building bullish momentum over the last few days but the fact we’ve seen a lower low in today’s candlestick despite the move higher does suggest some weakness in the move. It is likely that the pair races renewed resistance around 1.2163 because of this. Given the weaker outlook for the UK economy, any gains for GBP/USD are likely to remain as good selling opportunities and if the pair drops below current support at 1.1915 then it may be that we see a stronger pullback towards 1.1766.
