FX Daily: USD overbought, keeping selling pressures at bay for now
DXY was barely changed at a two-decades high of 114. DXY initially fell to a low of 113.33 during the Asian session. It turned positive after US consumer confidence came in stronger-than-expected at 108 in September vs the 104.6 consensus; August was also revised up to 103.6 from 103.2. The present situation and expectations sub-indices improved on job security and lower gas prices. Echoing the latest projections announced at last week’s FOMC meeting, Fed officials were committed to keep hiking rates to 4.4-4.6% to bring inflation down to its 2% target. Chicago Fed President Charles Evans reckoned the Fed could pause after rates peaked in March. The Fed’s projection to deliver some 125 bps of hikes over the next four meetings suggests smaller hikes are also near, especially if it follows through with a fourth 75 bps hike in November. Despite the positive sentiment, the USD is overbought and struggling to make significant further headway against other oversold currencies.
EUR depreciated 0.2% to 0.9594, its first close below 0.96. The European Central Bank’s top priority is controlling inflation and delivering on its mandate of price stability over the medium-term. To prevent inflation expectations from becoming unhinged, it has signalled several more hikes to return rates to neutral (a level it has yet to define) before deciding if more is needed. ECB President Christine Lagarde noted the weak euro and wide fiscal measures have added to the build-up in inflationary pressures. She added that the strong demand for services from the reopening of economies was losing steam and expects economic activities to slow substantially in the coming quarters. UK’s credibility crisis over its tax cut plans could spill over into Eurozone and the EUR. Even so, EUR is oversold and digesting Monday’s shock GBP sell-off.
AUD is under pressure to fall towards the Covid-lows of 0.57 (daily close) and 0.5510 (intra-day low) seen in March 2020. NZD held below 0.57, its Covid-low in March 2020, for a second day on risk aversion. The kiwi is setting its sights on 0.5470, the intra-day low on 19 March 2020. Another significant development was the CNY’s 0.5% depreciation to 7.1761 per USD, past the Covid-low of 7.1671 in May 2020. China is Australia’s largest trading partner. The currencies of Australia’s other top trading partners – Japan, South Korea, and India — are also significantly weaker than their pandemic bottoms. All said, AUD and NZD are oversold and may need to consolidate before resuming their slide
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