Welcome to another edition of Forex Friday, a weekly report in which we discuss selected currency themes mainly from a macro viewpoint, but we also throw in a pinch of technical analysis here and there.

In this week’s edition, we discuss the dollar, commodity currencies, and gold after a week full of central bank action.

• High beta currencies slump on hawkish ECB
• GBP/USD hit on split BoE, hawkish Fed
• USD/JPY wants 140
• Gold reverses on hawkish CBs

High beta currencies slump on hawkish ECB

After Thursday’s big slump for high-beta currencies, the first half of Friday’s session was a lot calmer. But with stocks heading further lower, “risk-off” remained the dominant theme, ahead of the US market cash open. The publication of stronger-than-expected European PMIs was unable to lift the mode too much, but at least helped to ease recession worries just a tad – even if the PMIs all remained below the expansion level of 50.0. Eurozone CPI was revised a touch higher to 10.1%, underscoring the ECB’s desire to keep its restrictive policy in place for longer.

If investors remain risk-averse, then the US dollar should be able to climb further in the days ahead.

While there is still hope that the downturn might be short-lived and that a recession might be avoided in some regions altogether, amid signs of inflation peaking in some regions like the US, the risks remain skewed to the downside for stocks and risk-sensitive currencies. This is because the world’s largest trading blocs signaled that their restrictive monetary policies are going to remain in place for longer than expected.

While the Fed was a little more hawkish in that the FOMC projected a terminal interest rate of around 5%, slightly more than the market had anticipated, the real surprise was the ECB, which caught many people by surprise. Traders became concerned about the ECB’s desire to raise interest rates at a 50 basis-point pace “for a period of time,” according to President Christine Lagarde.

Along with stocks, high-beta commodity dollars sold off, and this helped to support the safe-haven US dollar. So, it is worth watching the likes of the Aussie, Kiwi and Loonie to gauge investor risk appetite – or lack thereof – in the days leading to the festive season.

The USD/CAD has managed to reclaim the 1.35 handle and is knocking on the key 1.3680 resistance level. A break above here could open the way for a run towards 1.40 next, and thus a new high for the year.

GBP/USD hit on split BoE, hawkish Fed

The pound got a real pounding on Thursday following the conclusion of the major central bank meetings from both sides of the Atlantic. At the time of writing, the GBP/USD was still reeling. It was displaying a large inverted-hammer candle on the weekly time frame, around the 50% retracement level of the entire long-term downswing. This is potentially a key reversal pattern in the making. So, watch out below!

For confirmation, a move below recent low and the 200-day average around 1.2105 would be ideal from a bearish point of view (not shown on the chart).

Now the reason the pound fell hard was due to two reasons.

1. The Bank of England followed the footsteps of the US Federal Reserve by hiking interest rates by 50 basis points, lifting the Official Bank Rate (OBR) to 3.5%, the highest since October 2008. But the fact that GBP then fell, meant that investors were really surprised how split the BoE were, as two MPC officials, Tenreyro and Dhingra, voted to keep rates unchanged at 3%, while Mann voted for a bigger, 75 bps, hike. The other 6 agreed in line with market expectations to lift rates by 50bps. The doves argue that 3% interest rate is “more than sufficient” to bring CPI back to target. The latest MPC projections suggest CPI has reached a peak, although it is still expected to “remain very high” in the coming months.
2. The Fed was a bit more hawkish than expected, which explains why the dollar bounced back across the board. the day before, the US dollar has risen across the board. Thus, some of today’s weakness in the GBP/USD can be attributed to the dollar strength.

USD/JPY wants 140

The USD/JPY surged higher after reclaiming its 200-day average on the back of a hawkish Fed, before stalling around the 137.60 to 138.00 resistance. A clean break above here could pave the way for a run towards 140.00 next. However, if the dollar sells off again, then there is a risk we could see the breakdown of 135.00 more decisively. That’s not my base case scenario in light of this week’s price action.

The long-term outlook on the USD/JPY remains bullish regardless of what happens in the next term outlook- because of the Bank of Japan’s extraordinary loose monetary policy.

Gold reverses on hawkish CBs

Gold has turned lower on the week, hit by a rebound in the US dollar and bond yields, as well as profit-taking after its recent gains. With the key $1800 long-term resistance level holding, this could turn out to be a significant development.

As it turned out, the Fed and ECB were very hawkish, with the US central bank indicating that the terminal interest rate is going to be around 5%, which has helped to provide some support for bond yields. The ECB’s desire to raise interest rates at a 50 basis-point pace “for a period of time,” according to President Christine Lagarde, has also been alarming news for investors.

With interest rates set to rise more than expected, this should undermine the zero-yielding gold.

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