The USD is continuing to climb as yields increase, affecting various currency pairs. The movement is evident in currencies such as the AUDUSD, EURUSD, and GBPUSD, as they test technical levels.
For the AUDUSD, the 200 bar moving average on the 4-hour chart stands at 0.6514. A drop below this point could pave the way for the 38.2% retracement level at 0.65096 and potentially the 50% level at 0.64833.
Euro Testing Key Support Levels
In the case of the EURUSD, the currency has slipped past the 1.1663 level, quickly reaching targets between 1.1614 and 1.1629. If this support breaks, focus shifts to another range from 1.15680 to 1.1578, with a 38.2% retracement at 1.15357.
For the GBPUSD, the currency pair is testing the 61.8% retracement from the May low, at 1.33873. A drop below this level brings into view a swing area between 1.3360 and 1.3378, with the June low at 1.3371. A rebound would require surpassing the 1.3414 mark to regain more control.
With the US 10-year Treasury yield pushing past 4.3%, a level not seen consistently in over a decade, the technical pressure points mentioned are not just lines on a chart; they are the front lines of a fundamental divergence. The recent US CPI print coming in at a sticky 3.7% and a labor market that continues to add over 200,000 jobs per month gives the Federal Reserve every reason to maintain its “higher for longer” stance. We see this as a green light for continued dollar strength against currencies whose central banks are facing stalling economies.
Bearish Outlook for Pound Sterling
For us, this means it’s time to position for a breach of these supports, not a bounce. Looking at the Euro, the breakdown is happening as the Eurozone’s own flash inflation estimate cools to 2.4%, with powerhouse Germany reporting a sharp drop in factory orders. This policy divergence is a powerful tailwind. Consequently, we are not just watching that next swing area; we are actively buying put options on the EURUSD with strikes below 1.1500, looking at expirations 30 to 45 days out to give the move room to run. The options market confirms this sentiment, with the 25-delta risk reversal showing a growing premium for puts over calls, the highest in several months.
The situation with the Sterling is similar. While their inflation remains elevated, the Bank of England is now openly discussing the damage further hikes could do to an already fragile economy. This setup is historically bearish. We are positioning for a break of that key retracement level by structuring put debit spreads on the GBPUSD. This approach allows us to define our risk while targeting a move toward the 1.3200 handle, a level that would signify a more significant regime change.
In the case of the Australian dollar, its fate is tied not only to the Fed but also to China’s sputtering recovery. With Chinese youth unemployment data being suspended and property developers defaulting, the primary customer for Australian commodities is on weak footing. The break of the 200-period moving average should not be seen as a point of support but as the start of the next leg down. We are looking at this as an opportunity to sell call spreads with a ceiling around 0.6550, betting that any short-term rally will be shallow and quickly sold into. Historical precedent from the 2014-2016 commodity slump shows that once these key long-term averages break during a strong dollar cycle, the follow-through can be swift and deep.
