US Dollar Outlook: USD Upside Stalling, Risk Of Larger Setback

US Dollar Chart

USD Fundamental Highlights

  • USD losing its appeal temporarily.
  • Eyes on August and March peaks for support.

As risk appetite remains buoyant and commodity prices continue to soar, the US dollar has somewhat lost some of its appeal, with the greenback losing out to major counterparts across the board, excluding the Japanese yen.

That said, with the USD ending its streak of five consecutive weekly gains, markets appear to be long on dollars, which in turn raises the risk of greater unwind heading into next week, should risk appetite remain firm. On a technical note, as the USD index oscillates around the 94.00 handle, the weekly close is important, where a close below 94.00 may keep pressure on the downside.

US Dollar Outlook: USD Upside Stalling, Risk of Larger Setback

Source: Refinitiv

Individual narratives have been popping up over the past week, which in turn has taken some of the attention away from the US dollar. This has ranged from BoE tightening bets for the pound, JPY weakness stemming from higher commodities and bond yields, while the AUD has been helped along by China’s energy crunch induced coal buying, alongside the breakout in copper.

Looking into next week, with little on the economic calendar besides flash PMIs, risk appetite will likely dictate the state of play across the FX space. Here is a reminder that markets remain fickle in the current environment and thus choppy seas can be expected, besides cross-JPY.

A Note on the Japanese Yen

As oil prices trade at three-year highs, oil-importing currencies such as the Japanese yen will continue to remain weak. Therefore, looking to fade yen weakness is the equivalent of standing in front of the proverbial freight train.

Meanwhile, momentum indicators such as the RSI are showing that yen crosses are in overbought territory, although they are by no means at extreme levels and thus don't indicate that a reversal is imminent. However, I will be keeping a close eye for a pullback in oil and yields for a sign of a short-term top, alongside a dip in risk appetite.

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