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In this week’s edition, we discuss the major currencies and look forward to the macro events in the week ahead.

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 major currencies and look forward to the macro events in the week ahead.
 

Dollar forecast: DXY rebounds to test key level

This week’s US data has been mostly weaker: CPI, PPI, and jobless claims have all missed expectations, supporting the “peak interest rates” narrative. Yet, the dollar has bounced back. There are at least two reasons for this. First, it is because of weakness in foreign currencies: We have seen the euro, pound, and commodity dollars all taking a hit. The Aussie has dropped due to weakness in the Chinese yuan and metals prices, with both copper and silver dropping noticeably this week on the back of weak Chinese CPI and PPI data.

The weakness in Chinese inflation data has intensified concerns about demand from the world’s second-largest economy, where the recovery appears to be fading alarmingly. This was highlighted by a surprise 7.9% drop in imports on Tuesday, adding to the sluggish factory activity figures released last week. 

The second reason why the US dollar has found support is because of hopes that a deal will be reached on the US debt ceiling. While the latest talks between the two sides showed no progress, the fact that Biden’s meeting with House Speaker Kevin McCarthy has been postponed to next week means staff-level talks have yielded some progress. The US could default on its debt obligations if no resolution is found within the next 3 weeks or so.

For the dollar, there’s not much data to look forward to in the week ahead, with the exception of US retail sales and the ongoing debt ceiling talks.

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Source: TradingView.com
 

US Retail Sales

Tuesday, 16 May

Let’s see how high levels of interest and inflation rates have impacted the consumer. Demand concerns could intensify if we see a very weak retail sales print, leading to speculation the Fed may soon have to start loosening monetary policy again.

Ahead of that, the dollar index is now testing this key resistance area around 102.60, shaded in red. This is where the bearish trend of the falling wedge pattern meets prior resistance. A clean break above here is needed to confirm that a temporary low is in, otherwise, this bounce is just a countertrend move.
 

AUD/USD forecast: Chinese and Australian data in focus

Given the RBA rate hike and strong employment data from Down Under, you would think the AUD/USD would perform a lot better than it has done this week. Yet, it has been one of the weakest pairs, thanks largely to concerns about the world’s second-largest economy and Australia’s largest trading partner: China.

The AUD/USD will remain in focus as we will have key data coming up next week from both Australia and China. Investors have largely ignored hawkish talk from RBA Governor Philip Lowe, who noted that the central bank would continue to “pay close attention” to the evolution of labor costs. This makes the upcoming employment report all that important next week. But for the AUD/USD to make a comeback, concerns over China will have to recede. This puts the upcoming Chinese data into focus…
 

Chinese Data Dump (Tuesday, 16 May)

Retail sales, industrial production, and fixed asset investment are among the key data highlights from the world’s second-largest economy to watch in the early hours of Tuesday. China’s economic recovery appears to be fading, which was highlighted by a surprise 7.9% drop in imports last week, adding to the sluggish factory activity figures released in the prior week.  
 

Australian employment data (Thursday, May 18)

Following two consecutive months of forecast-beating employment data, and 7% inflation, the RBA decided in a surprise move to raise interest rates by another 25 basis points earlier in the month, lifting the AUD across the board, before concerns about China and the slump in metal prices weighed heavily on the Aussie. Domestically, the Australian labor market remains very tight. The unemployment rate is near a 50-year low. There are reports that companies are having trouble hiring workers.  Though the number of vacancies has declined a little, let’s see if this will be reflected in the hard data.

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Source: TradingView.com
 

GBP/USD forecast: What now for the pound?

The GBP/USD forecast has not been materially impacted by the Bank of England’s expected decision to raise interest rates by 25 basis points to 4.5% this week. The pound initially bounced back to trim its earlier losses as traders realised the BoE was actually more hawkish than expected and that more rate increases might be on the way. Yet, the GBP/USD struggled to get back above the 1.26 handle, leading to a drop back to 1.25 on Thursday, when the US dollar came back across the board. The USD found support in a mild risk-off trade, despite a sharper-than-expected increase in weekly unemployment claims and following the release of weaker-than-expected US inflation data on Thursday. Still, the longer-term GBP/USD forecast remains bullish, and it will probably head towards 1.30s once the impact of short-term dollar correction dissipates. But in the short term, a slightly deeper pullback cannot be ruled. Key support comes in around 1.25 handle, which was being tested at the time of writing.

(Click on image to enlarge)

Source: TradingView.com
 

Silver outlook: Metal drops to $24 on China weakness, dollar recovery

On Thursday we saw some of the key commodity prices like copper, crude, and silver all taking a plunge. A rebound in US dollar has hurt buck-denominated assets, while concerns over China have weighed on the demand outlook for certain commodities (see above more).

Silver needs to hold above the $24.00 key support area to maintain its bullish bias. It dipped below this level earlier today before bouncing back. At the time of writing, there were no signs of a bullish reversal here. The bulls looking to buy this dip must wait for a confirmed reversal signal.

(Click on image to enlarge)

Source: TradingView.com

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