Dollar analysis: DXY, EUR/USD, Gold and USD/CAD in focus – Forex Friday

• Dollar analysis: DXY set to close higher for 8th consecutive week
• Gold bides time ahead of US CPI but outlook remains bearish
• EUR/USD hovers near 1.07 as ECB policy decision looms
• USD/CAD clears key resistance as traders eye jobs data

Welcome to another edition of Forex Friday, a weekly report in which we highlight selected currency themes. In this week’s report, we will focus the US dollar, gold, USD/CAD and EUR/USD, ahead of next week’s key events: US CPI and ECB policy decision.

Dollar analysis: DXY set to close higher for 8th consecutive week

The US dollar has had another strong week and barring an unexpected sell-off today, it is set to close up for the eight consecutive week against a basket of foreign currencies. At the time of writing, the Dollar Index was trading around 105.00 and looking to expand its gains further, which should mean more weakness for the likes of EUR/USD, gold et., al (see below for more).

The greenback has been supported largely by US data continuing to surprise to the upside, while weakness in foreign data and currencies are also helping to provide support. Chinese and Eurozone data in particular have been rather weak, and correspondingly we have seen the euro and yuan slump against the dollar.

In so far as the US data is concerned, we had better-than-expected ISM Services PMI on Wednesday, followed on Thursday by the weekly initial jobless claims, which dropped back to the lowest levels since February. This has put some doubts over the narrative that the US labour market tightness is easing. Correspondingly, traders have pushed their expectations of the first rate cut from the Fed further out in 2024.

One risk facing the dollar is intervention from Japan, with the USD/JPY reaching levels last seen when the government intervened last year. Intervention from China has only helped to weaken the yuan further, causing the USD/CNH to hit a new high on the year today.

Gold bides time ahead of US CPI but outlook remains bearish

With the yuan weakening further, surely this is not good news for gold as it makes it dearer for Chinese to purchase the metal, while it is also euro negative as it could weigh on Eurozone exports. The next big event for gold, and indeed the dollar, is the CPI data next week, which could influence the Fed’s decision whether to hike further or not. The market appears convinced that the hiking is done. But thanks to the resilience of US economy, they are expecting interest rates to remain at current levels longer than they had previously been expecting. This is what has helped to keep the dollar underpinned and gold undermined.

The precious metal has found some technical support around its 200-day average around $1915. If it were to break below this level, which appears likely, then we could see another wave of technical selling leading up to that CPI report next week. Short-term support comes in around $1923, Thursday’s high.

EUR/USD hovers near 1.07 as ECB policy decision looms

The ECB is meeting on Thursday, September 14 and ahead of it the euro continues to show weakness signs. The EUR/USD and other euro crosses have come under pressure in recent weeks, owing to growth concerns both over the Eurozone and China, with the latter being one of the largest exports destinations for European goods. Data after data has disappointed with Eurozone GDP being revised lower this week and a number of German indicators all missing the mark. The probability of a final rate hike at this ECB meeting has fallen sharply. The key risk now is if the ECB hikes anyway, which should send the euro spiking higher – even if temporarily. As things stand, though, more weakness appears likely for the EUR/USD, especially given that the dollar is looking very strong across the board.

USD/CAD clears key resistance as traders eye jobs data

Like many other dollar pairs, the USD/CAD broke a key level this week to print a higher high and thus create a clear bullish signal. As can be seen from the chart, the USD/CAD, which had already broken its bearish trend line and moved above the 200-day average among other bullish signals, moved above prior resistance in the 1.3650 range. This level had offered strong resistance on a number of occasions in the past. Now that we have moved above here, this should clear the way for more technical buying in the days ahead, especially given that the Bank of Canada appears to be done with rate hikes and given that dismal GDP report.

Today’s focus will be on Canadian jobs figures for the month of August. The Canadian jobs report has been rather volatile in recent months, but one thing that has been consistent is the unemployment rate, which has risen from around 5.0% before the summer to 5.5% in the previous reading last month. For August, analysts are expecting around 17,500 net new jobs and an uptick to 5.6% for the unemployment rate.

Source for all charts used in this article: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R