DXY breaks above key level
USD still biased higher as on risk, Covid and growth
AUD head & shoulder threatens more weakness
German IFO needs to support strong PMI for help EUR
A shortage of key data on Friday should leave the market focused on Covid and other market headlines. DXY has broke above the key 92.50/62 level. The 92.50 represents congestion and the 92.62 marks the 61.8% Fib retracement of the September-January decline. Additionally, the 200dma also failed to hold buyers back. More upside could be seen and the still-crowded USD short group might be squeezed. There are clear fundamental reasons underlying this potential technical breakout, notably the expected outperformance of US yields and US growth.
New Covid cases/variant and vaccination have been increasingly under focus lately that triggered some risk selling. Not only the risk aversion is helping USD but also with the US advanced in terms of vaccination and new Covid cases slow.
All these should continue to support USD and encourage momentum buyers to join in. EUR will be vulnerable as the market will likely look beyond what the strong PMIs on Wednesday suggests. The new variants threatens a step-up in lockdown, especially in Europe where vaccinations are slow.
On AUD/USD, it seems that the classic head and shoulder pattern has formed fully but still unclear if the neckline will hold. With risk aversion increasingly due to growth rather than high yield/high inflation, the scope for AUD support diminishes. Thus, bias is to the downside for AUD/USD and AUD/JPY. Still, these weaknesses are likely limited to the near-term so long as the global recovery story remains largely in place.
In the UK, we expect retail sales to bounce back in February following the January slump. Nevertheless, the rebound is expected to be fairly subdued given that the January lockdown were maintained throughout February and thus limited in-store retailing. Our economists expect an increase in the headline by 2.5% m/m, a shade firmer than the median among a broad range of estimates. We are not expecting much GBP impact from the data even with moderate surprises to the data, as focus is still on relative Covid situation and risk sentiment.
Following the UK retail sales, German IFO survey results will be published. Strong results are needed to support the strong PMIs in order to stabilize EUR sentiment. Otherwise, we could see more EUR spec longs cutting positions as the Eurozone remains muddled by the Covid variants and vaccination complications. Our economists anticipate the business climate index to rise to 94.0 from 92.4, on the higher side of estimates but if headlines continue to be negative, EUR/USD still risks falling towards 1.17 after failing to find support from its 200dma on Wednesday.