Major FX Update: USD, EUR, JPY as SWIFT Limitations Take Effect

[MongiIG]

USD, EUR, JPY Analysis:

• USD remains bid as Putin warns nuclear forces are on high alert
• Euro woes continue as gas dependency on Russia limits Euro gains
• USD/JPY reassesses bullish continuation at major decision point

 

Putin’s Alarming Response to SWIFT Limitations and Freezing of Central Bank Assets

World leaders had a busy weekend discussing and implementing further sanctions on Russia as conflict in Ukraine continued. On Saturday, the West announced that some Russian financial institutions would be cut off from SWIFT, the global messaging platform that allows banks to communicate and send funds securely to one another. In addition, the EU and US decided to freeze the Central Bank of Russia’s (CBR) assets. Currently, the CBR has foreign reserves worth around $630 billion, with the majority of it rendered inaccessible for open market transactions that would see the Ruble recover some of its recent losses.

Essentially, central banks would look to use its foreign reserves to sell Euros or dollars in exchange for Ruble, increasing the demand for Rubles and supporting the value of the Ruble in the process. This process is explored in greater detail in our dedicated article on central bank intervention in the foreign exchange market.

U.S. DOLLAR (USD) BENEFITS FROM SAFE-HAVEN APPEAL

The U.S. dollar, like many other currencies witnessed sizeable, two way volatility towards the end of last week in response to news flow. The safe-haven appeal of the dollar is likely to support the greenback although, it remains susceptible to sizeable pullbacks should the global outlook suddenly improve.

The US Dollar Basket (DXY) reveals the recent volatility witnessed on Thursday with an attempted move towards 9780 before massively pulling back on Friday. At the open, the dollar looks to have received a bid in response to Putin’s alarming statements about placing his nuclear defences on high alert. Bullish continuation looks constructive as long as price action remains above 9689/9690 with 9780 level (June 2020 high) appearing as a significant level of resistance. A breakdown of the 9689 level brings the next level of support (9655 – 50% Fib of the 2020 high to 2021 low) into focus. Thereafter, trendline support could pose a challenge to further selling.

US Dollar Basket (DXY) Daily Chart

Source: IG, prepared by Richard Snow

 

EURO LIFTS OFF THE BOTTOM OF RECENT CHANNEL

The Euro has been plagued by a relatively dovish central bank and heavy reliance on Russian gas exports. This has played out in the EUR/JPY pair through a series of lower highs and lower lows but recently the focus on JPY has intensified as a safe-haven currency. As such, in a risk off environment, EUR/JPY could be expected to move lower but has help up fairly well thus far.

Looking at the chart, EUR/JPY presents a considerable area of confluence, propping up the pair. The intersection of the long-term trendline, 127.15 zone of support and the lower bound of the descending channel all providing considerable support. Fundamentally, the area of confluence is set to come under immense pressure should Russian nuclear rhetoric continue and threats of further escalation materialize.

Resistance appears at 130.75 and 131.70 (50% Fib – 2008 high to 2012 low).

EUR/JPY Weekly Chart

Source: IG, prepared by Richard Snow

DOLLAR OUTPACES JAPANESE YEN IN BATTLE OF THE SAFE HAVENS

USD/JPY remains rather elevated despite Thursday’s sizeable drop. Both the Yen and USD are considered as safe havens in times of geopolitical uncertainty however, the greenback looks favored compared to the Yen.

 

Technically, there are signs of potential USD/JPY exhaustion as the RSI prints lower highs since the beginning of the year while price action yet to make an official lower high. Such bearish divergence could limit USD/JPY strength in the near-term with 114.70 as nearest support. In the event of a bullish continuation, we would need to see a sizeable bounce off of 115.52 towards 116.35

USD/JPY Weekly Chart

Source: IG, prepared by Richard Snow

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--- Written by Richard Snow for DailyFX.com. 28th Feb 2022