China's Yuan And US Dollar Continue to Rally Ahead of FOMC and US Jobs Data

The Chinese yuan and the US dollar continued higher on expectations of increased inflow into the world's second largest economy while the US awaits the Fed monetary policy decision and key data points such as GDP and non-farm payrolls.

The US dollar index, a gauge that measures the greenback's strength against six major currencies on a trade-weighted basis, is holding near a six-month high. The USD/CNY pair has fallen for the sixth straight day to a new four-month low of 6.1806.

Chinese shares have been on the rise of late as the authorities are working on a plan to link the Hong Kong and Shanghai markets in such a way that Hong Kong investors can trade blue-chip stocks listed on the mainland exchange.

Besides, China's National Bureau of Statistics said that the average profit of the country's largest industrial enterprises rose 17.9% in June, accelerating from an 8.9% rise in May. So far this year, the profit has increased 11.4%.

Data from the US were mixed with a higher than expected Markit manufacturing PMI and a weaker than expected pending home sales number, but the market weighed the likelihood of the US Fed to indicate sooner rate hikes than the market has now priced in when the central bank reviews its policy.

The Fed Chair, Janet Yellen, had indicated earlier this month that the labour market needs to be stronger before getting into the hiking cycle. The two weekly jobless claims reports after her remarks had surprised on the higher side, increasing the expectations of dollar-positive signals from the Fed this week.

USD/CNY Technical Outlook

The yuan is now correcting its steep fall in the four months through April, which was amid suspected central bank intervention, driven by an expanding economy.

Technically, the pair is testing the 38.2% Fibonacci retracement of the January-April rally and the next important downside level is the 50% mark of 6.1545.

Next support is the 6.1340-6.1280 area, near the 61.8% Fibonacci level, and seems to be a stronger target before retesting the record low of 6.0400 touched in January.

On the higher side, 6.1955 will be watched ahead of the 23.6% level of 6.2140. Then comes 6.2290 ahead of a retest of the April peak of 6.2673.