In the opening days of 2024, the USDCNH currency pair embarked on a noteworthy upward trajectory, gaining 53 basis points in the first week and signalling potential further gains.
The surge is tied to the Greenback’s resurgence, with the US Dollar strengthening as traders recalibrated expectations of an imminent rate cut, originally anticipated in March. This shift in sentiment aligns with the latest US inflation data, revealing a rise to 3.4% in December, exceeding expectations and suggesting a potential need for prolonged steep interest rates to curb inflation, thereby bolstering the Greenback.
In stark contrast, China finds itself navigating a deflationary landscape. Consumer prices in December experienced a 0.3% decline year-on-year, and the producer price index marked a 15th consecutive month of descent, plummeting by 2.7%. As China adjusts its macroeconomic policies to support its economy, a clear policy divergence emerges between the world’s two largest economies, further influencing the dynamics of the USDCNH currency pair.
The USDCNH currency pair is currently charting a short-term uptrend, evident in the breakout above a descending channel pattern and sustained trading above the 100-day moving average on the 4H chart.
The breakout, initiated from the 7.14061 level, corresponds with the 100-day moving average, forming a support level. However, as the pair encountered the 7.18930 level, the Relative Strength Index (RSI) signalled overbought conditions, prompting a subsequent retracement.
Remarkably, this retracement found a solid foothold at the 61.80% Fibonacci Retracement Golden Ratio, emerging as a pivotal level. If this level resiliently supports against downside pressures, a retest of the 7.18930 level is plausible, propelled by renewed upside momentum. Conversely, a breakdown below with significant volume could shift sentiment, leading to a potential revisit of the 7.14061 level.
In conclusion, the USDCNH exhibits a short-term uptrend fuelled by the Greenback’s strength amid recalibrated rate cut expectations and upbeat US inflation. The technical analysis indicates a pivotal point at the 61.80% Fibonacci Retracement level, with potential for back-to-back weekly gains if the support holds, yet caution prevails for a breakdown scenario.
Sources: US Bureau of Labor Statistics, National Bureau of Statistics of China, Reuters, TradingView
Piece Written By Nkosilathi Dube, Trive Financial Market Analyst
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