US dollar exchange rates: Forecasts See Further USD Gains, USD/JPY Rally Provides Positive Impetus

By Rob Samson

US dollar (USD) exchange rates were carried higher in sympathy with an 80 pip climb against the Japanese yen (JPY) and the forecast is for further bullish action in the world's largest currency.

The yen dropped after three days of gains and the pair is now trading around 104.50. The US dollar rose on speculation that the Fed may taper on next week’s FOMC meetings.

Today's US Dollar Exchange Rates

• The pound sterling to US dollar exchange rate (GBP/USD) is unchanged at 1.6425.
• The euro dollar exchange rate (EUR/USD) is 0.08 pct lower at 1.3540.
• The Australian to US dollar exchange rate (AUD/USD) is 0.3 pct lower at 0.8786.
• The New Zealand to US dollar exchange rate (NZD/USD) is 0.17 pct down at 0.8313.

Note: Our USD quotes are taken from the wholesale spot markets. Your bank will charge a spread at their discretion when passing on a retail rate. However, an independent FX provider is so well placed on the market that they are able to deliver you up to 5% more currency. Please learn more here.

What is driving the US dollar exchange rate at present?

As mentioned, we have seen some solid buying in the USD/JPY pair overnight, and this has pushed the broader dollar index higher.

The underlying sentiment towards the USD remains generally positive, based on a perception that the US data has been on the strong side and that the Fed is set to taper further at the January 29 FOMC.

"We agree that a $10bn taper is likely, but this is now essentially expected as a minimum, and the data of late has been a little mixed rather than unambiguously strong (ISMs were a bit lower, Michigan consumer confidence too, employment report inconclusive). There is still an underlying expectation that US growth will pick up and that this will lead to spread widening and a stronger USD," say Lloyds Bank Research.

While this is the most likely scenario, Lloyds advise that they are wary of jumping the gun with the Fed still having a lot to do before QE is phased out, and "we remain a little concerned that natural flows will continue to weigh on the USD in a risk positive market."

Forecasts for the British pound vs US dollar

Sterling is also a favourite on global FX markets at present, hence we are seeing GBP/USD unchanged in something akin to a cancellation effect.

While Friday’s UK retail sales numbers were much stronger than expected, it is no big surprise that they haven’t led to more sustained GBP gains, as the Q4 retail sales outcome was still only a rise of 0.4%, and there is no necessary implication for Q4 GDP.

Even so, analysts at Lloyds Bank Research still see some value in GBP on a dip vs the likes of the Australian dollar. "The strength of UK growth and the declining trend in unemployment does suggest the possibility of a steady widening of yield spreads in favour of the GBP," say Lloyds Bank.

There will be interest in today’s CBI industrial trends survey for any indications on the momentum of the economy in January, but the focus will mainly be on tomorrow’s labour market data.

"A dip in the unemployment rate to 7.3% would provide further support to the GBP bull case. We would not expect anything from the MPC minutes to discourage this at this stage," say Lloyds.

With regards to the forecast for the pound dollar exchange rate, Camilla Sutton at Scotiabank reckons the GBP/USD is currently priced for perfection. However, declines through the course of 2014 are likely as USD strength starts to factor:

"This week will mark some important fundamental developments, including the release of employment and the BoE minutes, which should provide a foundation for the path of GBP. We suggest that the currency has been priced for perfection and even in an environment of improving employment, with inflation at target, the BoE will remain cautious for longer than the market currently expects. We hold a year‐end GBP target of 1.59."

Matthew Weller at GFT says: "The GBP/USD pulled back off 1.6450 resistance late last week, but rates have since recovered back up to test that key resistance level. The pair put in a 4hr Bullish Pin Candle to start the week, showing a shift from selling to buying pressure and serving as an omen for a rally back to the 1.6450 level. For today, a break and close above the key 1.6450 barrier would expose the recent highs at 1.6500 next."

Forecast for US dollar exchange rates today

With regards to the euro dollar, "all signals are in sell territory and spot closed below the 100‐day MA on Friday. Technically the currency is weak; with the next support level at 1.3500," says a currency forecast note from Scotiabank.

The EUR/USD broke down below key support at 1.3550 late in Friday’s North American session, turning the longer-term bias to the downside. So far this week though, the pair has recovered back up to test the 1.3550 level once again as traders look ahead to a low liquidity U.S. session due to the bank holiday. We maintain a neutral bias for today, and will watch for a bearish candlestick pattern to signal a possible shift from buying to selling pressure," says Weller.

Concerning the AUD/USD outlook Scotiabank say, "we expect AUD to close Q1 at 0.87 but to stabilise into year‐end closing at 0.90."

For the dollar yen exchange rate (USD/JPY) Weller says: "The USD/JPY has dripped lower so far this week, with bulls attempting to defend the 104.00 level in today’s Asian and now early North American trade. The failure to rally meaningfully late last week suggests buyers may be reaching a point of exhaustion on a longer-term basis. Heading into today’s North American trade, readers should watch for support to emerge around the near-term Fibonacci support levels at 103.64 (61.8%) and 103.29 (78.6%)."

ICN Financial have told clients that they are short on the Aus / US dollar rate below 0.8835 with targets at 0.8770 and 0.8735. Stop loss above 0.8890:

"The pair extended the upside pullback towards the broken support area, which turns to a resistance now among 0.8820-0.8850, where we expect the price to resume the bearish wave after testing that area. Holding below 0.8850 is required for price maintains the bearish bias; a break above the latter may extend corrections a bit deeper."