On Tuesday, a prominent member of the FOMC expressed opposition to the anticipated interest rate cuts by the Federal Reserve, causing an increase in bond yields and the value of the US dollar. The 7-year bond yield saw a rise of 7.6 basis points, which is almost double its average daily increase of 3.9 basis points over the course of a year. Similarly, the yields for bonds ranging from 5 to 20 years also experienced an increase of over 10 basis points throughout the day.
euro and Aussie dollar tumble
On Tuesday, Governor Christopher Waller, a voting member of the FOMC, stated that the central bank should refrain from hastily reducing its benchmark interest rate unless it becomes evident that the decrease in inflation will continue over a long duration.
Even though the Federal Reserve board has the final say on interest rates, Waller believes that rate cuts should not be implemented until there is strong evidence that inflation is consistently close to the 2% target. Considering that the core Consumer Price Index (CPI) is still much higher than the Fed’s goal and CPI increased to 3.4% year-on-year, it seems very unlikely to me that there will be a rate cut in March.
However, there is still an indication that there might be a decrease in the Federal Reserve’s interest rates in March, with a 64.2% likelihood, which has reduced from 76.9% the previous day. On the other hand, the chances of the rates remaining unchanged in March have increased to 34.1% from 19% the day before. The market forecast now suggests only four rate cuts in 2024, compared to five previously. Nevertheless, unless there is a major economic downturn, in my opinion, it is more realistic to expect two to three rate cuts. This situation could potentially benefit the US dollar in the future.
US dollar technical analysis and market positioning (weekly chart):
According to the IMM, traders still have a negative outlook on USD futures compared to all other currencies that can be traded. Although this negative sentiment is not at an extreme level as per historical standards, there is a shift happening in sentiment that is likely causing traders who were betting against the USD to close their positions and push the value of the dollar up. Additionally, since the USD has the highest interest rate compared to all other major currencies except for the New Zealand dollar, it indicates that the dollar is expected to perform better against these currencies.
EUR/USD technical analysis (weekly chart):
It is fascinating to note that the EUR/USD pair encountered a significant resistance level just below its 200-week moving average (MA) in December and subsequently formed a weekly shooting star candlestick pattern. Currently, the prices have dropped below the 200-week exponential moving average (EMA) and both of these metrics have caused bearish movements exceeding -4% since May. The EUR/USD pair is only -4.5% lower than its peak in December, and because I believe that market expectations are overly dovish, I maintain a negative outlook on the weekly chart for EUR/USD and anticipate a break below the 1.08 mark.
Also Read: Euro under pressure as dollar rallies to new 2024 high
EUR/USD technical analysis (daily chart):
In the daily chart of EUR/USD, we observed a noticeable breakout from a bear flag, confirming yesterday’s outlook. The bear flag suggests that the price may reach a target similar to the lowest point of December, but there is also a viable interim target around 1.08, which is close to the lower band of 1-week implied volatility. Moving forward, we maintain a negative outlook as long as the price remains below 1.095. Traders who expect a downward movement could take advantage of small movements in shorter timeframes or look for opportunities to sell when the price consolidates or continues to decline.
AUD/USD technical analysis (4-hour chart):
The Australian dollar experienced a continuous decline on Tuesday, and it is not unusual for prices to rebound during the Asian session after such a decline (especially if the session started off stable). The RSI 2 and 14 indicators reached oversold levels but are now rising as prices attempt to recover from their lowest points. Considering the high trading volumes near the cycle lows during the last hours of trading in New York, bearish investors may be caught off guard if prices rebound. Therefore, these investors may want to wait for a rebound before rejoining the downward trend on the four-hour chart.
The tendency is to search for indications of vulnerability at 66c or slightly lower than the 38.2% Fibonacci ratio at 0.6635, in anticipation of a decline towards 0.6550 and 0.6500.
