FX Majors Break Through Key Levels

Markets love round numbers! They act as important psychological markers and can prompt strong reactions in price action as well as grabbing the headlines. These levels can also act as decisive areas of resistance and support on a technical basis, with 1000s of orders to buy and sell usually located in these critical zones of confluence.

The current dollar slide has seen the world’s reserve currency fall over 4% from its early March peak. This has pushed two of the most popular majors similarly through significant round numbers. EUR/USD has taken out 1.10 while GBP/USD has advanced through 1.25 in early trade this morning.

The latter needs to close decisively above the year-to-date early February top at 1.1032 to cement this move north. Trend oscillators across various timeframes show the move still has legs. Cable bulls are eyeing up a weekly finish above the April peak at 1.2525 for more upside.

These moves come after two big risk events on yesterday’s calendar which has prompted dollar driven selling over any major strength in either the euro or sterling. That said, interest rates have been narrowing over the past few weeks between euro, UK and US rates as the Fed is increasingly seen as being near the end of its rate hiking cycle, while the ECB and the Bank of England still have some work to do.

CPI and Fed Minutes not helping USD

The marquee risk event of the week hit our screens yesterday with US headline inflation data falling to 5% in March while the core prints remained relatively hot and sticky. It is the monthly core reading of 0.4% which may still concern the Fed at its May meeting, as it is more than double what many economists reckon is needed to average over time to bring the annual rate of core inflation back to the central bank’s 2% target. Money markets didn’t budge a great deal after the data release, moving modestly lower to around a 66% chance of a 25bp rate hike from 75% before CPI. Analysts also note that a lot of the current price pressures are down to shelter costs which are backward-looking and set to turn lower in the coming months.

Also, important yesterday was the release of the FOMC minutes from its March meeting which gave a nod to the recent stress in the banking sector as tighter lending conditions are seen as a material factor. This is because they typically end up with higher unemployment, a recession and ultimately rate cuts. The ”r” word was actually also mentioned in the meeting minutes as a mild recession is now part of the Fed’ baseline scenario. It seems the window for a soft landing is closing rapidly with the first few weeks in May and numerous central bank meetings to determine if the dollar sinks below its February low at 100.82 on the DXY.