US Dollar Technical Analysis

EUR/USD surrendered last week’s gains as policy divergence extendsGBP/USD holds firm despite hawkish FOMC minutesNZD/USD buoyed by hawkish RBNZ statementThe analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

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EUR/USD Surrendered Last Week’s Gains as Policy Divergence Extends

Earlier this week the ECB President Christine Lagarde mentioned that she is “really confident” that euro zone inflation is under control. The sentiment presented is in stark contrast to that revealed in the Fed minutes last night where the overall message was that the committee’s confidence in getting inflation back to 2% has been negatively affected and it will take longer to regain it. The minutes were recorded before the most recent, lower US CPI print but emphasises that it is going to take more than one decent print to get the Fed seriously considering interest rate cuts.

EUR/USD was expected to surrender last week’s gains as a quieter week on the economic calendar provided an opportunity for the FX market to prioritise higher yielding currencies like the US dollar, Pound Sterling and the Kiwi dollar. EUR/USD continued to trade lower and has broken out of the ascending channel, but trades slightly higher in the London AM session after improved European flash PMI data for May. German manufacturing data – which has been terribly weak for many months now – headed closer to the neutral 50 mark and was accompanied by a marginal improved sentiment in the services sector too.

Channel support, now resistance, serves as the nearest challenge to dollar strength heading into the end of the week. 1.0800 and the 200-day simple moving average (SMA) present downside levels of interest.

EUR/USD Daily Chart

GBP/USD Holds Firm Despite Hawkish FOMC Minutes

Yesterday, UK inflation data revealed that consumer inflation slowed in April but not as much as expected. One sticking point was that services inflation – a very specific measure of inflation which has been stubbornly elevated – rose above the maximum anticipated level estimated by analysts and economists polled by Reuters.

The upside surprise led to an unravelling of UK rate but bets with markets delaying a potential rate cut from August to November with just one full rate cut priced in for this year. The pound and Gilt yields rose as a result, with GBP/USD following suit.

GBP/USD shot above 1.2736 only for the hawkish FOMC minutes to bring it back down to end the day marginally higher. At the start of today’s session cable trades higher once again, proving its resiliency around that 1.2736 mark. With both the BoE and Fed leaning more hawkish, it may be difficult to get a strong directional move in the absence of another catalyst - which may appear at the end of next week with US PCE data. For now, sterling pushes higher.

GBP/USD Daily Chart

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Hawkish RBNZ Meeting Buoys NZD/USD

The Reserve Bank of New Zealand (RBNZ) issued a clear warning around the troubling nature of domestic inflation which remains too high for comfort despite the bank maintaining one of the highest interest rates among major central banks.

The committee discussed raising interest rates and expressed that the economy has little capacity left to absorb higher interest rates, a tricky situation to be in. Markets have therefore delayed expectations of a rate cut to November.

NZD/USD has been rising since April and has continued to do so after breaking above the longer-term trendline resistance. The Kiwi dollar heads back toward the overbought conditions which may stifle further upside but there is still room in the shorter-term to add to existing gains.

0.6200 appears as the next significant upside level of resistance but first a test of yesterday’s high of 0.6152 is required. A pullback from here could see prices nestle around the 0.6050 level which coincides with the 200 SMA.

NZD/USD Daily Chart

--- Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX