Continued weakness from the Dollar allows Euro and Cable to continue rallying

Further gains for the major European currencies against the US Dollar as the retreat of the US currency continues for a third day. Both the Euro and the Cable extended their correction to the upside on the back of another round of weaker or rather mixed economic reports from the US that have allowed traders to reap short-term gains.

Market participants are reluctantly voicing their doubts on whether the Fed will keep their tightening agenda intact in light of the recent weakness in the data coming out of the domestic economy. However we have made our case about that in our previous reports and we continue to believe that even though we could see some further weakness in the short-term the broader sentiment is in favour of the US Dollar and these fresh peaks are good opportunities to buy for the longer term.

The Euro traded to 1.0750 on the back of the decline in the Production reports from the US and backed by ECB’s positive comments on the current progress of the QE programme. What is important to note here is that even though the Euro has the potential to extend its correction towards the 1.0800 area the moves lack momentum. This is an indication of the reluctance between traders to back the Euro for the longer run.

The Cable also extended its rally higher making it to the 1.4880 area reaping all the gains it can on the back of the current Dollar weakness. The UK currency could continue higher a little bit more with the 1.4950 level coming into focus but we should not forget the risk posed by the upcoming elections in 3 weeks. The uncertainty of the results and the potential gains from smaller parties could hurt the Cable in the medium term and we could see a rapid reversal lower.