Focus Shifts from Risk Rally to the Fed, NFP

US Dollar Weekly Forecast: Neutral

• Late USD surge to be tested this week
• AUD/USD: Risk rally helps Aussie claw back recent losses
• GBP/USD: Sterling recovers but upside resistance emerges
• USD/JPY: Markets propel the pair towards 160.00 after BoJ meeting
• Get your hands on the U.S. dollar Q2 outlook today for exclusive insights into key market catalysts that should be on every trader’s radar:

Late US Dollar Surge to be Tested this Week

The coming week brings with it plenty of US-centered event risk. The week starts with the Treasury’s quarterly refunding announcement – detailing how the US government will fund itself. Then on Wednesday US growth concerns could build momentum if ISM manufacturing PMI data follows the S&P Global version by dipping into a contraction.

On Wednesday, the FOMC statement is due, with the committee unlikely to alter the fed funds rate but there will be a strong focus on growth and inflation and how the group perceive these risks. Friday brings the week to a close with the NFP report with further resilience expected.

A bull flag appears to be in the works, with Friday’s late push hinting at a bullish continuation into next week but the recent risk rally has pushed the greenback aside.

US Dollar Basket (DXY) Daily Chart

Source: TradingView, prepared by Richard Snow

Risk Rally Helps Aussie Claw Back Recent Losses

The Aussie dollar used this opportunity to regain its positioning against the dollar after a series of sharp declines. AUD gained favour after the risk of a broader conflict in the Middle East appeared to subside and big tech stocks reported earnings. The high-beta currency has a historical link to the S&P 500 and has moved in close correlation to the US index. The S&P 500 has posted a rocky recovery this week after mega-cap stocks reported their quarterly earnings and AUD rose alongside it.

Aussie inflation also rose worryingly, helping to extend AUD gains, effectively removing rate cuts for the Reserve Bank of Australia for 2024 (according to market expectations). With Apple and Amazon next up this week, there is scope for further risk seeking behaviour. 0.6590 becomes the next level of resistance but the more immediate challenge at the start of the new week will be to trade above the 50 and 200-day simple moving averages.

AUD/USD Daily Chart

Source: TradingView, prepared by Richard Snow

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GBP/USD: Sterling Recovers but Upside Challenge Emerges

GBP/USD benefitted from the recent risk rally, recovering lost ground against the dollar. The psychological level of 1.2500, however, poses an immediate challenge for bulls at the start of the week as price action has already shown a reluctance to push higher. In addition, the 200-day SMA appears at 1.2557 should the initial hurdle prove ineffective.

With the Bank of England issuing a rather dovish message before the media blackout period, sterling may find gains hard to come by. The BoE anticipates inflation will drop sharply into the summer and early indications suggest it may stay there, according to Dave Ramsden.

GBP/USD Daily Chart

Source: TradingView, prepared by Richard Snow

USD/JPY: Markets Propel the Pair Towards 160.00 After BoJ Meeting

USD/JPY continues to power ahead, regardless of hollow threats (thus far) from Japanese authorities. The Bank of Japan (BoJ) meeting held the potential to issue a hawkish message regarding the yen’s weakness, but opted to stick to similar messaging regarding a calculated hiking cycle that is largely data dependent and contingent upon hitting the 2% inflation target.

The weekly chart below shows just how quickly markets piled into the long side of USD/JPY, particularly after US PCE data beat expectations. Japan enters its Golden Week holiday period with authorities undoubtedly in a state of unease. Lower liquidity conditions that typically accompany the bank holidays present an opportunity for maximum effectiveness should authorities decide to dump large amounts of USD for yen. FX intervention becomes a more imminent threat the higher the pair rises. The 155.00 level was the prior line in the sand and now 160.00 is fast approaching with the pair immediately testing channel resistance.

USD/JPY Weekly Chart

Source: TradingView, prepared by Richard Snow

The daily chart reveals the massive move higher on Friday with the RSI heading further into overbought territory. With the USD-JPY interest rate differential still significantly wide, markets realise that any FX intervention is likely to provide better entry levels for bullish continuation plays until such time as the BoJ can meaningfully close the gap. Therefore, a co-ordinated effort between Japan, South Korea and the US to strengthen the Asian currencies may be needed now more than ever.

USD/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

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Major Risk Events in the Week Ahead

In the coming week, the US Treasury department is expected to outline how the government is going to fund itself, with a mix of short and longer-term bond issuances which can impact the value of the dollar.

Thereafter, markets will pay closer attention to ISM manufacturing PMI figures for April after the S&P Global version of the same survey narrowly placed the sector into a contraction. The ‘soft’ data gains in significance after US first quarter GDP drastically missed the estimate of 2.5% (annualized), coming in at a mere 1.6%.

Then the main events of the week roll in with the FOMC rate decision followed by NFP on Friday. Markets will be looking for any hawkish shift in rhetoric from the Fed in response to re-accelerating inflation. Robust jobs data supports the ‘higher for longer’ outlook but weaker growth poses a concern for the Fed but it is probably too soon to consider stagflation risks.

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX