FX Daily: Time to pause

USD might stabilize; focus might shift to Omicron from Fed.
Philip Wee14 Jan 2022
    Photo credit: Unsplash Photo

    Nasdaq Composite fell 2.5% to 14807, its lowest close since mid-October. Dow and S&P 500 fell less by 0.5% and 1.4% respectively. Tech stocks fell more because it benefitted most from the Fed’s pandemic stimulus which Fed Chair Jerome Powell said the US economy no longer “needs or wants”. Fed Governor Lael Brainard affirmed the first Fed hike could come as early as March. Fed Presidents Patrick Harker (Philadelphia) and Charles Evans (Chicago) see 3-4 hikes this year. However, the US Treasury 10-year yield did not rise on Fed’s comments and fell with equities to 1.704%, its lowest level since 4 January. US initial jobless claims disappointed and increased to 230k during the 8 January week from 207k a week earlier.

    DXY closed below 95 again but found support around 94.6 or its 100-day moving average. According to the 14-day RSI, DXY is now more affordable with a reading of 35 compared to more than 70 in late November. Risk aversion led the JPY and CHF higher by 0.4% each. USD/CHF has a psychological support level at 0.91. CAD and AUD rallied 0.4% but gave back all gains to end the session flat. USD/CAD was supported at 1.25 or its psychological support level around 200-day moving average.  Although GBP and EUR rose less by 0.35% each, they closed 0.1% above Wednesday. Even so, GBP is the most overbought currency around 1.37 and the psychological 1.15 level awaits EUR.

    The four-week rally in GBP might lose momentum. GBP could not break its 200-day moving average at 1.3740 and retreated to 1.3706, unchanged for the session. The 14-day RSI is above 70, signaling overbought conditions. The 10Y Gilt yield was dragged lower by its US counterpart to 1.105%; it could not break the 1.20% ceiling in October. Bank of England MPC member Catherine Mann reminded markets that the global central banks will respond differently to inflation risks in each country. Going by Powell’s and Brainard’s testimonies this week, the Fed has recognized inflation risk more than its peers and is most committed with a strategy to return inflation to its 2% target. If the USD stabilizes, GBP will be less able to ignore the festering political problems at home.
    While this week has been mainly about the Fed, it might be time to stop ignoring Omicron. Infections have surged with more countries imposing restrictions. For example, China’s zero-Covid policy and its hardline responses in two major ports, Dalian and Tianjin, could stress global supply chains again. Record Covid hospitalizations in the US is starting to warn against complacency over Omicron, while less severe than Delta, is still a danger to the unvaccinated.

    Quote of the day
    “Your net worth can fluctuate, but your self-worth should only appreciate.”
        Chris Gardner

    14 January in history
    Franklin D. Roosevelt became the first US President to fly an airplane while in Office in 1943.

    Philip Wee

    Senior FX Strategist - G3 & Asia

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