The USDCNH currency pair is currently reaching heights not seen in the past three weeks. This surge is attributed to the Chinese Yuan losing ground against its stronger US counterpart. The backdrop of this movement is a set of contrasting developments in the two economies. In the United States, the latest jobs data from Friday contradicted the prevailing dovish sentiment in the market. The Non-Farm Payrolls report for November revealed an impressive addition of 199,000 jobs, surpassing the previous 150,000 and exceeding the market’s forecast of 180,000. Simultaneously, the unemployment rate unexpectedly dropped from 3.9% to 3.7%, contrary to the anticipated unchanged rate of 3.9%. This surprising data led to a reduction in market expectations for an early rate cut, boosting the strength of the US dollar.
On the flip side, China faces concerns related to the emergence of deflationary worries. These uncertainties cast a shadow of doubt on the overall health of the world’s second-largest economy. The dynamics between the two nations contribute to the current movements in the USDCNH currency pair, creating an intriguing landscape for traders in the week ahead.
Technical
On the 4H chart, the currency pair found support at the bottom of a longstanding downtrend, with a double-bottom formation leading the upside charge. The 25-SMA (green line) has crossed above the 100-SMA (orange line), confirming the shift in momentum. However, at the dynamic resistance of a rising wedge, the currency pair could witness an imminent trend reversal in the upcoming sessions.
If the dynamic resistance holds, the pullback could see the pair looking for support at 7.1756, where a prior resistance level could hold buyers at the point of convergence with the dynamic support of the wedge. Should a breakdown occur here, a selloff could result in a crossing below the 25-SMA, reversing the momentum toward 7.1606, where the 100-SMA comes back into the equation.
However, if the dynamic wedge resistance fails to withstand the current bullish momentum, a breakout could result in a test of the Fibonacci midpoint at 7.2119. Higher resistance is established at 7.2221, should the momentum continue, before the 61.8% Fibonacci golden ratio comes into play at 7.2354, which will likely pose a challenging level to cross.
Summary
With diverging developments in the respective economies, the USDCNH currency pair is trading near 3-week highs. However, with a rising wedge forming, the dynamic resistance of the wedge could be a crucial level to watch to determine whether a pullback is imminent or the uptrend will continue toward 7.2119.
Sources: Koyfin, Tradingview, Reuters
Piece written by Tiaan van Aswegen, Trive Financial Market Analyst
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