The USD will likely be expected to be highly volatile in the coming weeks trading. This is considering potential for USD volatility to accelerate in response to monthly inflation data on deck for release. The economic calendar details that markets are expecting headline and core inflation to cross the wires at 3.6% and 2.3%, respectively. A material upside surprise on inflation could intensify the Fed taper debate, which would likely correspond a sharp move higher in Treasury yields and the broader USD
The US treasury yield curve reached 1.64% on 11th May 2021 from 1.58% a couple of days ago 2021 which is slightly lower than the previous high of 1.73% in April. This implies the fears of inflation are back in the markets which resulted in a risk off mindset in many of the investors. Hence, the greenback is expected to appreciate in the coming days among its major G8 currency pairs.
As the economy reopens in the wake of the COVID-19, more Americans expect inflation to increase over the next few years. Overall, the expectation is that the inflation rate would be up to 3.4% one year from now — its highest level since September 2013 — and at 3.1% three years from now, according to the Federal Reserve Bank of New York’s Survey of Consumer Expectations for April.
Expectations for how much more consumers will spend on homes, rent and the cost of a college education all rose in April, while the expected change in oil prices fell slightly from a high in March. At the same time, consumers surveyed by the New York Fed also expected household income and spending growth to retreat slightly, but remain above a 12-month average, the central bank said.
From the chart above, we can observe that the USDCHF has been on a long term down trend. However, if we look at it more closely, the pair has found a support on the daily timeframe around the 0.90000 region. The trend seems to be heading upwards to test the long term downward trendline.
If we zoom in on the chart in greater detail. We can observe that there is a morning star candlestick pattern with a bullish candlestick confirmation. Moreover, there is also a MACD divergence on the daily chart, with the trend making a lower low but the MACD making a higher low.
Hence, due to all of the above reasons I would recommend a buy call for the USDCHF with the first profit level at 0.92900 where there is a strong resistance at that price level. If the candlestick continue to appear to be bullish we can continue to long this pair until 0.93600. Alternatively, we can also wait for the pair to reach the long term downward resistance and break above the resistance and test it as a support before continuing higher.
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