Overall Outlook: Bullish
The US dollar is regaining strength as global uncertainties and relative yield advantages drive capital inflows. Meanwhile, the Chinese yuan is increasingly under pressure from domestic disinflation, policy divergence, and fading investor confidence. USD/CNH is technically coiling below resistance, preparing for what could be a decisive upside breakout.

Fundamental Analysis

The US economy continues to outperform expectations relative to its global peers. While the most recent GDP growth reading showed a quarterly contraction of -0.3 percent, annual growth remains solid at 2.0 percent. Inflation is steady at 2.3 percent year-on-year, and monthly CPI readings (0.2 percent) show no resurgence in price pressures. The Federal Reserve has kept interest rates unchanged at 4.5 percent and remains in no rush to cut, citing stable employment and sticky services inflation.

China, in contrast, is facing deepening deflationary and structural challenges. Headline inflation is now flat at 0.0 percent YoY, and retail sales growth has slowed to just 0.24 percent MoM. While annual GDP growth remains high at 5.4 percent, quarterly expansion has decelerated to 0.7 percent, revealing a potential loss of momentum. Domestic demand remains fragile, and exports are under pressure from declining global trade volumes.

The People’s Bank of China has maintained its policy rate at 3.1 percent, but real interest rates are now positive and rising due to near-zero inflation. This dynamic has prompted concerns over monetary policy becoming too tight, even without formal rate hikes. There is growing speculation that the PBoC will intervene with further easing measures, which could weaken the yuan even further.

With the US offering higher real yields, a stronger consumer sector, and a more credible monetary stance, the divergence in macroeconomic conditions continues to favour a bullish bias in USD/CNH.

Technical Analysis

USD/CNH is currently trading at 7.2128 and forming a base between 7.18 and 7.22, showing signs of accumulation. The price remains just below the Ichimoku Cloud, with the Kumo narrowing, indicating a reduction in resistance density. A breakout above 7.2350 would signal the end of the current consolidation and open the door to a bullish trend continuation.

Ichimoku signals are beginning to align:

• The Tenkan-sen (Conversion Line) and Kijun-sen (Base Line) are compressing, suggesting equilibrium and a potential breakout build-up.
• The future Kumo is bearish (Span B above Span A), but flattening – a typical signal before a trend reversal.
• The Lagging Span is close to price and starting to lift, which would be an early bullish signal on a confirmed move higher.

Momentum indicators are turning constructive. RSI is at 41.93 and showing bullish divergence against price – a strong early reversal signal. MACD is below zero, but the lines are converging, and the histogram is contracting, indicating downside momentum is fading. A bullish MACD crossover appears imminent.

Volume is also supporting the base-building thesis, with slightly higher activity on green candles. This accumulation pattern adds weight to the possibility of a breakout above the cloud and confirms growing interest from buyers.

From a price action perspective, the formation resembles an ascending triangle, where the horizontal resistance at 7.23 is being tested repeatedly, while higher lows are forming below. This is typically a bullish continuation pattern.

Sentiment Analysis

The sentiment picture strongly supports the bullish USD/CNH narrative. Speculative futures positioning shows a steady build-up in USD long exposure across the board, while sentiment on the Chinese yuan remains fragile. Offshore institutions remain cautious on CNH amid weakening confidence in China’s post-COVID recovery and persistent capital outflows.

The yuan’s status as a semi-managed currency complicates pure sentiment readings, but the consistent pressure on the PBoC to stabilise the exchange rate suggests underlying bearish dynamics. Policymakers have been forced to intervene verbally and via fixings to curb depreciation, signalling discomfort with market-driven yuan weakness.

Risk appetite for China-related assets has also declined as concerns grow over property sector instability, lack of fiscal stimulus, and uncertain regulatory signals. This is contributing to a steady outflow from yuan-denominated bonds and equities.

USD, on the other hand, remains the global safe haven of choice. Options market data shows increased demand for dollar call options across Asia FX pairs, including CNH. Volatility premiums are rising, suggesting markets are anticipating a significant move – likely skewed to the upside.

Conclusion

USD/CNH is offering a compelling bullish setup, supported by a clear macroeconomic divergence, a shift in sentiment, and an increasingly favourable technical structure. The pair is coiling beneath a major breakout zone and shows signs of accumulation, bullish divergence, and building momentum.

If price breaks and closes above 7.2350, it would validate a fresh upward leg targeting prior highs around 7.30 and beyond. Until then, the risk-to-reward remains skewed in favour of positioning for a breakout.

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