USD/CNY forecast: Here’s why the Chinese yuan firing on all cylinders

The USD/CNY exchange rate continued its strong downward trend this week, reaching its lowest level since April 2023. It dropped to a low of 6.8955, down sharply from the all-time high of 7.3500 as the Chinese yuan gains steam. 

Chinese yuan gains steam after the Supreme Court tariff ruling

The USD/CNY pair continued its strong downward trend after the Supreme Court ruled against Donald Trump’s tariffs. It has dropped in the last 14 consecutive weeks, making the yuan one of the best-performing currencies this year.

The yuan soared after the People’s Bank of China (PBOC) delivered its interest rate decision. As was widely expected, officials left interest rates unchanged, with the 1-year remaining at 3% and the 5-year at 3.5%.

The rate decision is a sign that Beijing’s officials are comfortable with the stronger currency, which may affect the economy. 

This decision came a few days after the SCOTUS ruled against Trump’s tariffs, a move that will give China an upper hand in negotiations. 

Also, the decision came as recent macro data showed that the country’s economy is slowing. The most recent report showed that the economy slowed by 4.5% in the fourth quarter, its slowest pace since 2022.

Another recent report showed that the country’s retail sales dropped to a three-year low of 3% in December. China has also remained in a deflationary period in the past few years.

The US Dollar Index has slumped

The USD/CNY exchange rate has slumped because of the ongoing US dollar crash. Data shows that the dollar index slumped to $97.83 on Tuesday, down sharply from the all-time high of $110.18.

The dollar retreated after the US published a weak economic report. For example, a report released last week showed that the American economy expanded by 1.4% in the fourth quarter, badly missing the expected growth of 3.3%.

More data showed that the labor market has stagnated, with a senior Federal Reserve official warning that the economy likely lost jobs last year. The unemployment rate has remained above 4% this year.

Looking ahead, the USD/CNY pair will react to a potential US attack on Iran. It will also react to the upcoming statements by some of the top Federal Reserve officials like Raphael Bostic, Lisa Cook, Christopher Waller, and Susan Collins. 

The US will also publish more macro data, including the upcoming consumer confidence and house price index. 

USD/CNY technical analysis 

The weekly timeframe chart shows that the USD to CNY exchange rate remains under pressure. It formed a triple-top pattern at 7.3400 and the neckline at 7.

The pair has now moved below the 38.2% Fibonacci Retracement level. Most notably, it is about to form a death cross pattern as the spread between the 50-week and 200-week Exponential Moving Averages (EMA) narrows. 

The pair remains below the Supertrend indicator, while the Average Directional Index (ADX) soaring to 50. That is a sign that the downward trend is gaining steam.

Therefore, the most likely scenario is where the USD/CNY pair continues falling, with the next key target being at 6.70, the 61.8% Fibonacci Retracement level.