- US dollar strengthens amidst positive economic data, eyes critical resistance levels
- Federal Reserve's rate cut expectations challenge dollar's rally
- Japanese yen faces pressure as USD/JPY approaches historic highs, intervention speculation rises
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The US dollar has been back in vogue over the past two weeks as the latest economic data has shown that the US economy remains buoyant.
After volatile movements in the 103 region last week while investors expected the Fed's decision was expected, the greenback continued to rise with the pricing of those who maintained their expectations that the Fed will keep rates higher for longer.
As a result, the DXY which closed the week in the 104 region, is now also technically above a critical resistance.
Considering the 2024 oscillation, the 104.3 level remains a critical resistance according to the Fibonacci measurement after confirming that the short-term downtrend has been broken. After this level, the 104.9 level stands as the next 2nd resistance level, while the current momentum is likely to continue until 105.4, which corresponds to Fib 0.618.
Although the strong US economy is seen as the biggest factor supporting the dollar, the Fed's clear statement that it will cut interest rates for the year will remain the biggest factor suppressing the dollar.
The main issue here is whether Powell will cut interest rates less than the 3 rate cut projection, depending on the economic data throughout the year.
Recently, Atlanta Fed President Bostic said that the expects the bank to cut rates only once this year, by a quarter of a percentage point he said. While this forecast is far from the market's expectation, if Bostic's view gains favor or if the data in the coming months remain strong, the dollar is likely to continue its dominance over other major currencies.
However, in the usual scenario, a rate cut by the Fed in the second quarter of the year could cause a decline in the dollar. This could trigger the index, which could rise up to the 105 region, to once again enter a downward trend. As a result, the dollar index can be expected to remain under pressure in the first half of this year, depending on the forecast of a recovery in the short term and then a downward momentum.
Dollar Also Under Pressure With Intervention Speculations From the Far East
Despite Japan showing signs of exiting the expansionary monetary policy by giving up the negative interest rate after many years, the USD/JPY continued its rise, hittinh a peak at 151.
The pair has once again reached the price level of October 2022, when Japan intervened in the exchange rate.
The current level was also tested in November 2023 and at that time, a retreat was discussed as speculation increased that the Japanese authorities could intervene in the exchange rate. Although no intervention was seen at that time, the BOJ's rhetoric was effective.
Currently, the Japanese yen is at the weakest levels of recent years against the dollar. While the Japanese government continues to warn that the depreciation of the yen does not reflect the fundamentals of the economy, speculation in the market that there may be an intervention against the yen has started to increase again.
Although the Bank of Japan took interest rates out of negative territory last week, this action was not enough to support the yen. Investors expect interest rates in Japan to remain low for some time and the interest rate differential with the US supports the yen's weakness.
Now, with USD/JPY at historic highs, market participants are on high alert, fearing an intervention at any moment. This makes it less likely that the pair will break the hard resistance area at 151.
In a possible breakout, the pair is likely to jump towards 154 - 158 levels, but even the rhetoric of the Japanese government is enough to keep the pair at this point. In case of an intervention, USD/JPY may quickly fall towards the 140 region.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple points of view and is highly risky and therefore, any investment decision and the associated risk remains with the investor.
