USD Losing Its Grip: Greenback Stagflation and the Global Currencies Surge

Overview:

• EUR: The Euro is maintaining its strength, driven by the weak USD, despite the ECB's dovish stance.
• AUD & NZD: Both the Australian and New Zealand Dollars are gaining strength, propelled by a weak USD, with the AUD benefiting from stable economic conditions and potential rate cuts.
• GBP: The British Pound is showing bullish momentum, supported by favorable inflation and wage growth data.
• CAD: The Canadian Dollar continues to perform strongly, driven by favorable commodity prices and trade policy developments, specifically, delayed tariffs imposed by Trump.
• CHF: The Swiss Franc is also on a bearish trajectory against the USD, with technicals suggesting further downside.

USD: Facing Bearish Pressures Amid Economic Uncertainty

Previously, we have discussed how the Dollar might play out based on 2 key aspects, the technical and the fundamental outlook.

USD Fundamental Outlook

We anticipated a momentum catalyst for the Dollar through the CPI and PPI releases, which came in positive. Although these strong numbers suggested a potential bullish follow-through, they weren’t enough to trigger a bullish trend.

Instead, weaker-than-expected employment numbers exerted downward pressure on the Dollar. This puts the FED in a difficult position, as it now faces the challenge of balancing high inflation with a slowing labor market. This scenario raises the risk of stagflation, where:

1. Reduced Purchasing Power:

• High Inflation means prices of goods and services are rising rapidly.
• If people are unemployed or earning less, they have less money to spend.
• This combination severely reduces purchasing power, making it hard for people to afford even basic necessities.

2. Decreased Consumer Spending:

• When prices are high, but incomes are low or unstable, people cut back on spending.
• This leads to lower demand for products and services, which can hurt businesses and lead to further layoffs, worsening unemployment.

3. Wage-Price Spiral Breakdown:

• Normally, inflation can be balanced out if wages rise alongside prices.
• But with high unemployment, wages stagnate or even decrease because there's more competition for jobs.
• This widening gap between prices and wages makes living costs even more burdensome.

4. Investment Uncertainty:

• High inflation creates economic uncertainty, discouraging businesses from investing or expanding.
• Coupled with high unemployment, businesses are even less likely to hire new workers, worsening the job market situation.

5. Policy Challenges:

• Central banks typically raise interest rates to combat inflation but lower rates to stimulate employment.
• With both high inflation and high unemployment, it becomes difficult to decide which policy to prioritize, leading to complex economic challenges.

Normally, inflation is managed by raising interest rates, but this can worsen unemployment and slow economic growth.

Conversely, stimulating growth and employment (e.g., by lowering interest rates) can worsen inflation. This makes it very difficult for policymakers to effectively address the situation. Weaker employment numbers pressure the FED to find a balance between supporting economic growth and controlling inflation. This complexity makes policy decisions more challenging, influencing the FED's stance and market expectations.

This combination of rising prices and high unemployment can lead to a vicious economic cycle that's hard to break, which is why it's considered a dangerous economic situation.

USD Technical Outlook

Before

After

We previously outlined the likely price movements. For reference, check out the analysis here: 

ACY SecuritiesForex Market Insights: USD, AUDUSD & NZDUSD Analysis.

Scenario #2 unfolded as anticipated, with price reaching and breaking below the immediate low, closing weak on the weekly timeframe.

Technically, we are in a bearish environment as the price is trading below equilibrium, a critical level that poses risks for bulls, reflecting the fundamental pressures:

Bearish Confluences:

1. Equilibrium Level: Trading below the 50% mark of the entire range, indicating bearish momentum.
2. Rejection at Premium Level: Strong rejection at the premium zone, signaling weakness and a lack of bullish momentum.
3. Prolonged Discount Trading: Price has been trading below the 50% level for an extended period, showing no signs of gaining upward strength.
4. Volume Imbalance: The volume imbalance has been filled and respected, reinforcing the bearish bias.

The fundamental weakness from high inflation and poor employment data aligns with the technical bearish environment, creating a synchronized bearish outlook for the Dollar:

• Fundamentally, weak employment data pressures the FED, signaling potential rate cuts or cautious policy. This diminishes the Dollar's appeal.
• Technically, price action confirms this sentiment, trading below equilibrium and showing consistent rejection at premium levels.

Both perspectives point to continued Dollar weakness unless there's a significant shift in economic data or policy stance. The combination of fundamental stagflation risks and technical bearish confluences creates a reinforcing cycle, driving the Dollar's current downtrend.

This week, there are a few high-impact events for the USD, with FOMC being the most significant.

Major Impact

Amid stagflation and continued Dollar weakness, we leaned towards a bullish outlook on foreign pairs last week. We were targeting high breakouts and expecting price to trade to and through significant highs, as the Dollar struggled to gain upside traction.

AUD: Aussie Dollar Poised for Continued Bullish Momentum

We already reached the 0.63305 level, trading through it as discussed previously in: 

ACY SecuritiesForex Market Insights: USD, AUDUSD & NZDUSD Analysis.

We anticipate increased volatility on Tuesday and Thursday, with expectations of a 25 basis point rate cut. This move aligns with recent unemployment data and the decline in the inflation rate recorded in January.

The Australian economy remains stable, making the AUD an attractive currency to trade with a bullish outlook, especially given the ongoing weakness of the USD.

If the opportunity arises, we could look for a retracement entry between the 0.63227 and 0.63442 levels.

Additionally, we may target the 0.63674 level. As long as the price remains above 0.63305, we anticipate continued upward momentum.

NZD: Kiwi Gains Ground as US Dollar Weakens

The NZD is gaining momentum alongside the AUD, indicating that both currencies are outpacing the strength of the USD.

We're expecting a follow-through, with price potentially reaching the 0.57378 level as part of an upside continuation in response to the ongoing weakness of the US Dollar.

RBNZ Anticipating a Rate Cut

We also anticipate a 50-basis point rate cut this week, though it’s not expected to have as significant an impact compared to other major currencies like the Aussie.

Although both have already priced in a rate cut, the interest differentials favor the Aussie over the Kiwi. The Australian Dollar still holds a stronger position compared to the New Zealand Dollar.

EUR: Euro Maintains Strength Despite ECB's Dovish Stance

The EUR has been steadily moving upward, approaching the 1.05331 level. The continued weakness of the greenback is driving the EUR to strengthen.

If we break above the 1.05140 level, we could see further upside momentum, potentially reaching and surpassing the next significant resistance at 1.05331.

We don't expect any major economic events, or 'red folder' data, to significantly impact the Eurozone this week.

The European Central Bank (ECB) continues to maintain a dovish stance, with recent rate cuts aimed at stimulating economic growth and addressing ongoing disinflation concerns. This cautious approach reflects the ECB's focus on balancing inflation control while supporting economic recovery.

Despite being Dovish, technically, we are seeing strength with EURO.

GBP: British Pound Showing Strength with Robust Economic Data

We have successfully broken through the 1.25497 level and reached 1.26139, where we’ve seen a test. If this level is breached, we expect the price to continue pushing upward toward the 1.28112 level.

Key GBP Insights:

• Inflation: January's inflation is predicted to increase to 2.8% from 2.5% due to the introduction of VAT on private school fees and higher airfares.
• Wage Growth: Wage growth data is anticipated to show an increase to 5.9% in the three months to December.
• Business and Consumer Confidence: Both are expected to decline, reflecting concerns about U.S. trade policies.

The USD is still experiencing a fresh breakdown, and market dynamics could shift once the FED outlines its next steps in the upcoming FOMC meeting.

CAD: Canadian Dollar Remains Bullish on Commodity

The CAD has maintained its bullish momentum, with no signs of weakness at the moment. The current factors continue to support the CAD, reinforcing its strength.

Key Factors Influencing CAD Strength:

1. Trade Policy Developments: The CAD's appreciation is partly attributed to delays in the implementation of U.S. tariffs on Canadian imports. U.S. President Donald Trump signed a directive for further investigation into tariffs imposed by trading partners, postponing immediate tariff actions. This uncertainty has led to market skepticism regarding the severity of potential trade measures, benefiting the CAD.
2. Commodity Prices: Canada's economy is significantly influenced by commodity exports, particularly oil. Fluctuations in global commodity prices can impact the CAD's value. For instance, a 0.5% decline in oil prices was noted recently, which may exert downward pressure on the CAD.
3. Monetary Policy Divergence: The Bank of Canada (BoC) has adopted a less dovish stance, refraining from providing forward guidance on interest rates due to uncertainties over potential U.S. tariffs. This cautious approach contrasts with the Federal Reserve's policies and contributes to the interest rate differential between the two countries, influencing the CAD's strength

If CAD continues in strength and USD doesn’t make any recovery, we’d like the Loonie to reach the 1.41195 level and potentially, the 1.39274 level.

CHF: Swiss Franc Tests Lower Levels Amid USD Weakness

Swissie dropped almost 200 pts in the start of the trading day this week.

We might see a further downside, reaching the 0.89651 level.

Once we break the 0.89651 level, and USD furthers its weakness, we could see price potentially testing the 0.89136 to 0.88541 level.

“The market is never wrong – opinions often are” - Jesse Livermore

Jesse Livermore’s quote, “The market is never wrong – opinions often are,” is a powerful reminder for traders to always respect the market’s movements rather than being attached to preconceived opinions or analysis.

1. Trust the Market’s Price Action: If the market is moving in a direction contrary to your expectations or analysis, don't stubbornly stick to your view. Instead, adapt to what the market is showing you. The market is the final judge—it reflects the collective sentiment and actions of all participants. So, if prices are moving lower or higher, it’s important to acknowledge that shift and not fight it.
2. Avoid Confirmation Bias: It's easy to get trapped in your opinions and only look for information or setups that confirm what you want to believe. This week, remain open-minded and avoid letting your biases cloud your judgment. Stay objective, follow the trends, and adjust your strategy accordingly.
3. Adaptability is Key: The market is dynamic, and conditions change quickly. What works in one market condition might not work in another. Be ready to pivot, cut losses when necessary, and take advantage of new opportunities. Don’t let past ideas or opinions hold you back.

In short, the market’s movement always speaks louder than any theory or analysis you might have. Embrace the market's truth, stay flexible, and adjust your strategy to what’s actually happening in the market rather than what you think should happen.

This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplies by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.