USD/CNH grinds near multi-day top surrounding 7.2000 amid US-China tension, hopes of higher Fed rates

• USD/CNH seesaws around the highest levels since November 2022, sidelined of late.
• China’s inability to please markets with stimulus measures, PBoC rate cuts weigh on Yuan.
• US Dollar benefits from hawkish Fed signals, upbeat US data and fears of Sino-American tussles.
• Fed Chair Powell’s bi-annual testimony will be key to watch for clear directions.

USD/CNH buyers keep the reins for the fourth consecutive day as they prod the highest levels since November 2022 during early Wednesday in Europe. In doing so, the offshore Chinese Yuan (CNH) pair justifies the broad weakness of the Chinese currency, as well as the US Dollar strength, amid upbeat US data and hawkish Federal Reserve (Fed) clues. Additionally, favoring the pair buyers are the market’s fears of the US-China tension and the monetary policy divergence between the People’s Bank of China (PBoC) and the Fed.

Earlier in the day, China’s Ministry of Finance (MoF) recently announced its intention to take drastic measures while cutting the purchase tax during 2024-25 and 2026-27. The same joins the latest headlines from Reuters suggesting the Chinese government advisers call for more stimulus measures.

That said, the People's Bank of China (PBoC) first cut in the two key lending rates (namely the Loan Prime Rate (LPR) and Medium-term Landing Facility (MLF) rate) for the first time in almost a year to propel the market’s liquidity and tame calls of economic slowdown. However, the moves failed to inspire the CNH bulls and drowned the currency toward the fresh yearly low.

On the other hand, the geopolitical fears surrounding the US and China weigh on the sentiment in Asia and fuel the USD/CNH prices amid a dicey market. Recently, China’s Ministry of Foreign Affairs (MoFA) said that the US has distorted its political promise to China. Late on Tuesday, US President Joe Biden termed Chinese President Xi Jinping a dictator and flagged concerns of intense Sino-American tension earlier in the day.

Elsewhere, hawkish comments from the Fed policymakers, mainly the nominees, and strong US housing data also fuel the USD/CNH price as markets await Fed Chairman Jerome Powell’s bi-annual testimony.

Above all, USD/CNH buyers cheer the monetary policy divergence between the PBoC and the Fed.

Technical analysis

A six-week-old ascending trend channel, currently between 7.2200 and 7.1400, restricts short-term moves of the USD/CNH pair. Also acting as an immediate downside filter is the 21-DMA level of 7.1280. It’s worth noting that the RSI and MACD conditions suggest buyers are running out of steam.