Last week ended with a massive move in the US dollar currency pairs. The dollar’s strength persisted in 2022, but Friday was a massive reversal day – the biggest since 2009.
The move is interesting in the context of what lies ahead – the US midterms elections, the inflation report, and the end-of-the-year flows. So is this strength here to stay?
EUR/USD
As we get closer to the end of the trading year, the EUR/USD struggles to form a bottom. Despite heavy selling and a hawkish Fed, the currency pair consolidates near parity and threatens to break above.
It did trade above parity ahead of the last ECB meeting but was quickly sold on the back of a hesitating ECB and a hawkish Fed. However, the rally from last Friday is not accidental, especially since it followed a strong NFP report.
Therefore, the EUR/USD is on track to regain parity, given the US dollar weakness seen across the FX dashboard.
USD/JPY
After trading above 150, the USD/JPY exchange rate fell on the back of the Bank of Japan intervening in the currency market. However, it holds above 145 while the dollar is being sold against other currencies.
Effectively, the play for the rest of the trading year might be on the JPY crosses. More precisely, the EUR/JPY cross has more room to the upside, especially if the EUR/USD rally extends beyond parity.
AUD/USD
The AUD/USD rallied on the back of reports that China is about to end its COVID-19 zero policy. Australia is a big exporter to China, and the market viewed the news as positive for the Australian economy and, thus, for the currency.
Moreover, the Reserve Bank of Australia might tighten financial conditions further after the last inflation report showed that the prices of goods and services keep rising in Australia. Therefore, the AUD/USD rally may continue, with 0.7 looming large ahead of the end of the trading year.