Overview
The US dollar experienced significant strength following the release of hawkish minutes from the Federal Open Market Committee (FOMC), which reignited speculation regarding potential rate hikes. This development has led to a notable increase in the USD/JPY currency pair, while simultaneously exerting downward pressure on EUR/USD, AUD/USD, and NZD/USD.
Market Reactions
On the day of the announcement, US bond yields rose, with the 2-year yield reaching 3.47% and the 10-year yield climbing to 4.087%. The stock market, represented by the S&P 500 and Nasdaq, initially gained over 1% but later retreated from its highs. The EUR/USD pair fell to an 8-day low, influenced by the hawkish FOMC minutes and the announcement of ECB chief Christine Lagarde's early departure.
In the forex market, USD/JPY surged nearly 1% to a six-day high, making the Japanese yen the second weakest major currency. Conversely, NZD/USD saw a significant decline of 1.3%, marking its worst performance in five months after the Reserve Bank of New Zealand (RBNZ) maintained interest rates, dampening rate hike expectations. AUD/USD also fell below the 0.71 mark ahead of an employment report, indicating potential volatility.
Technical Analysis
US Dollar Index (DXY)
Despite a general outlook of a weaker US dollar for the year, short-term risks appear skewed to the upside. The DXY has formed a bullish candle, indicating a false break below the 96 level. The index is approaching a resistance zone between 97.77 and 98.00, which includes previous swing highs and moving averages. A breakout above this zone could lead to further declines in major FX pairs.
USD/JPY
The bullish momentum for USD/JPY is evident, with the pair closing above December's high and nearing a target at the monthly pivot point of 155.43. However, a significant resistance level is present around 156.00, coinciding with the 50-day moving average. While the near-term outlook is positive, there is a broader expectation that the yen may regain strength over time, particularly if a swing high is established.
Futures Positioning
Recent data indicates that futures traders were net-short on the USD by $20.5 billion, the most bearish sentiment since June. This positioning is near levels that have historically preceded bullish reversals. Large speculators are close to flipping to a net-long position, which could signal a shift in market sentiment if US economic data continues to improve.
Conclusion
The hawkish tone from the FOMC minutes has significantly impacted the US dollar, leading to a rally in USD/JPY and a reassessment of other major currency pairs. Traders are advised to monitor upcoming US economic data closely, as it may influence market sentiment and positioning in the forex market.