FX Week Ahead (DXY, GBP/USD, AUD/USD and USD/JPY)

• Major event risk stemming from the UK: unemployment and inflation data
• US rates market ramps up the likelihood of cuts from March, bond yields sour, but DXY maintains trading range possibly on safe haven appeal
• Chinese Q4 GDP data to inform global economic outlook
• The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

US Dollar Hangs on Despite Weaker Treasury Yields and More Aggressive Rate Cut Forecasts

The US dollar holds its current trading range despite lower yields and more imminent rate cuts. The US 2-year yield continues its six-day decline and markets anticipate nearly 25 basis point cuts each meeting from March until November. However, keep in mind the Fed tend not to adjust rates in the lead up to presidential elections meaning we effectively have fewer windows for the Fed to act.

US 2-Year Treasury Yields

Source: TradingView, prepared by Richard Snow

The US Dollar Basket, often viewed as a proxy for USD performance, has traded within a range for the better part of the last fortnight. The major 103.00 level has capped dollar upside with the 200 and 50-day simple moving averages adding to the zone of resistance.

USD faces a number of headwinds including declining yields, more imminent prospect of rate cuts and easing price pressures.

Implied Fed Funds Rate via Fed Funds Futures Market

Source: Refinitiv, LSEG, prepared by Richard Snow

Despite last month’s slightly hotter CPI readings, inflation is expected to continue dropping as prior base effects (resulting in upside risks to inflation forecasts) are likely to have come to an end. USD appears to be holding onto the range due to its safe haven appeal after the joint US and UK strikes on Houthi targets at the end of last week. Gold, the most notable safe haven asset rose into the weekend.

US Dollar Basket Daily Chart

Source: TradingView, prepared by Richard Snow

GBP/USD Volatility Expected to Pick up in Response to Major Economic Data

The UK is due to release major jobs, average earnings and inflation data this week. The Bank of England will keep an eye on average earnings, although, this has been less of a focal point for policy setters as services inflation has occupied more attention in recent months.

UK inflation is expected to see further improvement.

GBP/USD has crept higher but continues to show reluctance to advance above the recent swing high. Daily price ranges have been modest, as has volatility – a situation that may change this week in light of the incoming data.

Price action trades above the 200 SMA after the golden cross was observed but immediate resistance at 1.2794 comes into play at the start of the week, at least until Tuesday when the data comes rolling in. Given the data flow, the recent high of 1.2828 has the potential to witness a test, particularly if the US dollar succumbs to bearish pressure or responds to easing geopolitical tension.

On the downside, 1.2736 appears as immediate support, followed by 1.2585 some distance away.

GBP/USD Daily Chart

Source: TradingView, prepared by Richard Snow

AUD/USD Unable to Capitalise on Bullish Potential – Drifts Toward Trendline Support

Despite a sizeable trade surplus update earlier this month for November, the Aussie has struggled to maintain any bullish momentum. AUD/USD now heads towards trendline support and the 50 SMA which provides a solid decision point for the pair before assessing the next move.

If indeed the US dollar dips lower this week, we could see a bounce higher in AUD/USD but any upside potential may be limited by China’s Q4 data which is out on Wednesday. The Chinese economy continues to witness an uneven recovery with improving export data in December but weakening credit growth, not to mention the deflation problem which is ongoing.

Source: DailyFX, prepared by Richard Snow

USD/JPY in Focus Ahead of Japanese Inflation Data – BoJ Urgency Subsides

USD/JPY trades higher this morning after previously finding resistance at the 50 SMA (blue line) and the 146.50 level. The yen has lost ground against the dollar after rising inflation and wage growth data lacked persistence.

Recent CPI and wage growth data has tempered calls for the Bank of Japan to step away from negative rates. On Thursday, Japanese inflation data for December will add to the narrative, either building on the case for policy change or working against it if we see a move lower.

Channel support and the 145 level prop up price action, with 150 still the major level to the upside but US dollar upside remains in doubt.

USD/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

https://www.dailyfx.com/news/fx-week-ahead-gbp-usd-aud-usd-and-usd-jpy-20240115.html