Unleashing the Power of the US Dollar: Exciting Opportunities on EUR/USD, GBP/USD, and USD/JPY as Yields Soar
US DOLLAR FORECAST – EUR/USD, GBP/USD, USD/JPY
- The U.S. dollar accelerates higher as U.S. Treasury yields extend rebound following a poor performance in late 2023
- Attention will be on the ISM manufacturing survey and the U.S. nonfarm payrolls report later in the week
- This article focuses the outlook for the U.S. dollar, analyzing price action for major pairs such as EUR/USD, GBP/USD and USD/JPY ahead of high-impact events later in the week.
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Most Read: US Dollar Q1 Fundamental Outlook: A Tale of Two Halves – Weak Start, Strong Finish
The US dollar, as measured by the DXY index, started the new year on the front foot, rising for the third consecutive session, supported by a rebound in U.S. Treasury yields, with the 10-year note up 7 bp to 3.93%. In this context, the DXY index climbed 0.7% to 102.10 in early afternoon trading in New York, posting its biggest daily advance since October, ahead of high-impact events later in the week.
Key releases, including the ISM manufacturing survey and the U.S. nonfarm payrolls report (NFP), will give an opportunity to assess the economic outlook and ascertain if projections of aggressive interest rate cuts for 2024 hold merit. As a frame of reference, traders currently discount 142 basis points of easing over the next 12 months, as shown in the chart below.
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2024 Fed Funds Futures (Implied Rate by Monthly Contracts)
Source: TradingView
If manufacturing activity accelerates in a meaningful way and employment growth surprises to the upside, investors are likely to pare bets on deep interest-rate cuts, foreseeing that the Federal Reserve will be reluctant to slash borrowing costs substantially in a stable economy for fear of reigniting inflation. This scenario would be bullish for the U.S. dollar.
On the flip side, if the data disappoints and shows cracks in the economy, especially in the labor market, it would not be surprising to see the Fed’s policy outlook shift in a more dovish direction, an outcome that would put downward pressure on yields and, by extension, the U.S. dollar. Any NFP print below 100,000 is likely to produce this response.
The image below shows consensus forecasts for ISM and NFP.
Upcoming US Economic Data
Source: DailyFX Economic Calendar
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EUR/USD TECHNICAL ANALYSIS
EUR/USD rallied to multi-month highs in late December, but pivoted lower after failing to clear channel resistance near 1.1140, with the pair sinking towards 1.0935 on Tuesday. The pair is likely to bottom out in this region before initiating the next leg higher, but in the event of a breakdown, a move towards channel support and the 200-day simple moving average near 1.0840 could unfold quickly.
Conversely, if the bulls regain decisive control of the market and trigger a turnaround, the first line of defense against future advances is located at 1.1020, followed by 1.1075/1.1095. Sellers need to defend this band at all costs – failure to do so could result in a rally towards channel resistance, presently positioned above 1.1170.
EUR/USD TECHNICAL CHART
EUR/USD Chart Created Using TradingView
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GBP/USD TECHNICAL ANALYSIS
GBP/USD also sold off on the first trading session of 2024, slipping below 1.2675 and pushing towards confluence support around the 1.2600 handle, where several swing lows align with the lower limit of a short-term rising channel. It is crucial that this technical floor holds in the coming days, as a breakdown could spark a decline toward the 200-day simple moving average.
In contrast, if selling pressure abates and cable perks up, resistance looms at 1.2675, and 1.2765 thereafter. On further strength, the focus shifts to last month’s peak near 1.2830. Overcoming this hurdle will present a formidable challenge for the bullish camp, but a breakout could pave the way for a potential climb towards the psychological 1.3000 level.
GBP/USD TECHNICAL CHART
GBP/USD Chart Created Using TradingView
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| Change in | Longs | Shorts | OI |
| Daily | 10% | 11% | 11% |
| Weekly | 3% | -5% | -2% |
USD/JPY TECHNICAL ANALYSIS
USD/JPY rallied off support on Tuesday but fell short of recapturing its 200-day simple moving average. If the pair stays below this indicator for too long, sellers could reload and make a comeback, setting the stage for a drop below 140.95, but further losses could be in store on a push below this threshold, with the next area of interest at 139.85.
On the other hand, if the bulls manage to propel the exchange rate above the 200-day SMA around 143.00, we could see a rally towards 144.80. Surmounting this obstacle may be difficult, but a successful push above it could establish favorable conditions for an upward move toward the 146.00 handle. Sustained strength might embolden the bulls to aim for 147.20.
USD/JPY TECHNICAL CHART
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Unleashing the Power of the US Dollar: Exciting Opportunities on EUR/USD, GBP/USD, and USD/JPY as Yields Soar
In the world of currency trading, the US dollar (USD) is often considered the dominant player. Its strength and stability have made it a reliable choice for investors seeking a safe haven for their funds. However, recent developments in the global economy have given the USD even more power, making it a prime choice for traders looking for exciting new opportunities.
One major factor contributing to the increased strength of the USD is the rising yields on US Treasury bonds. As yields rise, the value of the dollar also rises, making it a prime opportunity for traders to capitalize on. In this article, we will delve into the exciting opportunities available for traders on some of the most popular currency pairs involving the USD – EUR/USD, GBP/USD, and USD/JPY.
EUR/USD: A Classic Pair with High Potential
The EUR/USD currency pair is one of the most popular and heavily traded pairs in the forex market. As the two largest economies in the world, the United States and the European Union have a major influence on global trade and finance, and their respective currencies reflect that strength.
So, what makes this pair exciting for traders right now? The answer lies in the widening yield spread between the two economies. With the Federal Reserve (Fed) raising interest rates and the European Central Bank (ECB) keeping theirs at record lows, the yield differential between the two has increased, making the dollar more attractive to traders. As a result, the EUR/USD pair has been experiencing volatile swings and sharp movements, making it an exciting currency to trade.
For instance, in early June 2021, the Fed signaled a possible interest rate hike in 2023, causing the USD to rally against most major currencies, including the EUR. This led to a sharp decline in the EUR/USD pair, reaching a low of 1.21 by late June. However, by early August, the pair had bounced back and reached a high of 1.19, showcasing the potential for profit on this pair in a short time frame.
GBP/USD: Riding the Wave of Brexit and Inflation
The GBP/USD pair, also known as the “cable,” has always been a favorite among traders due to its high volatility and strong trends. However, in recent years, Brexit and the COVID-19 pandemic have added even more excitement to this pair, making it one to watch closely.
Now, with the UK finally exiting the EU and the global economy recovering from the pandemic, the GBP/USD pair has a new factor to contend with – inflation. The UK economy has been experiencing higher-than-expected inflation rates, prompting the Bank of England to consider raising interest rates. This has resulted in the GBP gaining strength, making it an exciting opportunity for traders to take advantage of.
For example, in July 2021, the GBP/USD pair reached its highest level in two years at 1.40, as the Bank of England mentioned the possibility of a rate hike. This created an opportunity for traders to go long on the pair and profit from the rising pound.
USD/JPY: Playing on the Yen’s Safe Haven Status
The USD/JPY pair is also a popular choice among traders due to the safe-haven status of the Japanese yen (JPY). During times of market uncertainty or volatility, investors often seek the relative safety of the JPY, driving its value up and making the USD/JPY pair attractive for traders.
In recent months, as the global economy recovers and vaccination rates increase, market sentiment has improved, leading to a decline in the value of the JPY. This has presented a prime trading opportunity for the USD/JPY pair, with the dollar gaining strength and reaching its highest level since March 2020 at around 111.65 in July 2021.
Practical Tips and Strategies for Trading on These Pairs
Now that we have explored the potential opportunities on these three pairs, let’s discuss some practical tips and strategies for trading on them successfully.
1. Stay Up-to-Date on Economic Data – As with any currency pair, staying informed about important economic data and events can help you make better trading decisions. Keep an eye on interest rate announcements, employment reports, and inflation data for the US, Europe, and the UK.
2. Monitor Central Bank Policies – The monetary policies of central banks greatly influence their respective currencies. Pay attention to any changes or hints from the Fed, ECB, and Bank of England regarding interest rates, as they can heavily impact these currency pairs.
3. Use Technical Analysis – Technical analysis can be a valuable tool in predicting market trends and identifying trading opportunities. Use charts and indicators to spot entry and exit points and support and resistance levels.
4. Be Mindful of Risk Management – As with any type of trading, it is crucial to have a risk management strategy in place to protect your investments. Set stop-loss and take-profit levels and avoid overleveraging.
In conclusion, the recent surge in US Treasury yields has unleashed the power of the US dollar, making it a highly attractive currency for traders. The EUR/USD, GBP/USD, and USD/JPY pairs are all worth watching, as their respective economies and market conditions offer exciting opportunities for profit. Keep these practical tips in mind, and always stay informed to make the most of these dynamic currency pairs.
