The US dollar strikes back

The previous week in the financial markets was pressured down by rising inflation expectations. The hawkish monetary policy shift across the globe boosts demand for the US dollar. As there are no significant economic publications this week, traders pay attention mostly to geopolitical agenda and changing market conditions.

According to the Fedwatchtool from CME group, probabilities for the interest rate to be kept at the same level until the end of 2026, have increased substantially.  That pressures major currencies against the US dollar, keeping volatility above the threshold value of 20.

SOFR futures (overnight swap rate futures), which are visible on the CME group’s website, display some convexity in expectations. Literally it shows that expected yields of 30 year treasury bonds of the US are now higher than the predicted level, and the borrowing cost on the interbank market is higher than it was expected to be.

That situation explains the elevated capital flows to the US dollar at the moment, and fragile position of stocks, Gold and crypto currencies.

As a result, EURUSD and other currencies get under pressure against the Greenback, while yields of 30 year bonds of the US continue growing close to 5%.

It’s worth noting that the similar dynamics is observed across other regions, but the US dollar has a greater weight than, for example, Australian dollar in terms of capital flows.

What would be in focus this week?

This week, traders will continue to monitor the development of the US-Iran confrontation, which doesn’t seem to reach a resolution soon, as the US moves troops to potentially start the on-site operation. Houthis from Yemen joined the war on Iran’s side, complicating the situation. Brent oil has hit $116 on Monday, so we can expect oil prices to stay elevated for an indefinite period of time, with inflation expectations continuing to increase.

That might create a downside pressure for major currencies against the US dollar, including Gold. Metals display weak performance even after three weeks of initial volatility spike, which might not be a bearish signal per se, but not a bullish one either.

The NFP publication on Friday, April the 3rd, would be the main publication throughout the week.

Let’s go to charts now and try to project any possible trading opportunities for the upcoming week.

CADJPY

The Canadian dollar, as a crude oil related currency, might rebound early in the week against Japanese Yen, as it’s positioned right inside of the dynamic support area between 20 and 50 moving averages, and might follow the bullish pressure of Crude oil.

The price is locked in a coil (a short-term trading range). If it is broken to the upside, it’s possible to observe CADJPY going up toward 116 area and higher.

XAUUSD

Gold continues to consolidate at the bottom of the trading range, not displaying any signs of recovery. The strength of the US dollar makes the price action vulnerable, especially if it tries to break through key resistance areas of borders of formations.

Testing $4600 would be indicative for the further price action of Gold. If it fails to break through, it might stay locked in a trading range for a longer period of time.