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US dollar strength continues ahead of inflation data

The forex pairs are not giving a clear indication of risk-on or off this morning, but there is a clear move into the global reserve currency, which is also supported by the rising US yields. There will be sentiment reports from Germany and Europe which have the potential to surprise the markets but the focus for the day will be the US CPI reading at the start of the US session.

Market Brief

During the Asia-Pac session equity markets around the globe were mostly lower this morning, although Chinese indices (Hang Seng and Shanghai Stock Exchange) are up 0.31% & 1.46% respectively. The Chinese Yuan is also relatively strong against the other currencies that we follow on the YouTrading heatmap. The Hang Seng has quite a bit of work to do to get through that consolidation period that started in mid-March. A break above 23,000 would be the best signal that a bull run could follow but the path of least resistance currently is down towards 19,000 and the recent swing lows.

The news and trading day are still being dominated by events unfolding in Ukraine. The US intelligence agencies said that the war in Ukraine will likely enter a “more protracted and a very bloody phase”. The UK has said it will intervene if Russia uses chemical weapons and Germany promised more support to Ukraine. NATO is also opening the door to new members which will likely come from Finland and Sweden.

US CPI inflation is expected to reach a new 40-year high of 8.4% in today's session, up from 7.9% in February. The core rate (excluding food and energy prices) is projected to increase to 6.7% from 6.4%. Fed policymaker Evans yesterday said a 50 basis points increase in interest rates in May should be considered and "probably highly likely".

The US yields were generally up across the curve and have again started today's London session rising. The benchmark US 10-year yield is at 2.822% at the time of writing and this is likely to keep the US dollar index supported at around 100.00 for the rest of the London session.

Long term, a weekly close above the 100 level and we could see the DXY keep moving higher to the 2.618 Fibonacci extension and the 102.500 level.

The UK labour market report released this morning showed another decline in unemployment to 3.8% in the three months to February, an amount equal to its pre-pandemic low, while employment increased by 10k. Annual wage growth accelerated to 5.4% from 4.8% previously, still falling below the current inflation rate.

The pound is not finding any bids on the relatively good economic data and is likely to stay lower whilst the flows go into the greenback.

European and the German ZEW survey will provide one of the first indications of economic activity trends for this month in the Eurozone. With the rising cost of living, disruptions from Ukraine and sanctions against Russia, it is unlikely that the mood across Europe is going to be buoyed. There is also a problem with the French election uncertainty to deal with for the rest of the month.

With the pound and euro both on the back foot against the US dollar, I am looking to the EURGBP as a potential trade. 73% of traders on the ActivTrader platform think the EURGBP should be going higher, so my idea is to wait for a break of yesterday’s lows and then look for a continuation pattern to the downside. Currently, the daily market structure is making higher highs and higher lows, so sweeping the recent significant swing lows will be key.

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