Dollar shorts were forced to take a step backward yesterday. A modest risk-off pushed US yields lower and narrowed the US-German spread further. US CPI was also softer than expected, reinforcing market hopes on a Fed rate cut.
However, two attempts of EUR/USD to break above the 1. 1340/50 resistance failed, triggering a technical setback. Later, a sharp decline of the oil price and president Trump considering sanctions related to the Nord stream 2 gas pipeline were a dollar positive/euro negative too. EUR/USD closed the day at 1.1287. The impact on USD/JPY was modest. The pair closed little changed at 108.50
This morning, sentiment on risk remains fragile. The dollar is slightly losing ground. EUR/USD returns close to the 1.13 level. USD/JPY trades in the 108.30 area. The Australian dollar is declining further. Australian job growth was strong, but a small miss in the unemployment rate (5.2%) kept the hope alive for further RBA easing. Australian yields continue to set record low levels. AUD/USD is drifting to the low 0.69s.
Today's eco data (EMU production, US import prices and jobless claims) are probably only of intraday significance for FX trading. The euro area finance ministers meet to discuss disciplinary action on Italy (budget). Yesterday, the dollar was in slightly better shape. Even so, we see little upside for the dollar ahead of week's Fed meeting. Comments from US politicians on the Fed (Wilbur Ross) and on a too strong dollar might cap USD gains too.
At the end of last week, US yields touched new cycle lows, pushing EUR/USD temporarily above the 1.1324 resistance. US yields bottomed this week as substantial Fed easing was discounted, removing some pressure from the dollar. Still, the USD rebound was unimpressive. Longer term, the dollar might have entered a sell-on-upticks pattern.
The 1.1200/1.1250 looks solid EUR/USD support. Further sustained gains beyond 1.1324/48 still open the way to the 1.1448 target area. On Tuesday sterling rebounded on solid UK labour data. Yesterday, sterling initially gained further after Boris Johnson said he didn't aim for a no deal Brexit. However, this ‘political' rebound had no strong legs. EUR/GBP closed near 0.89. We expect more technical trading as the contest for the leadership of the conservative party continues. Still we have the impression that extreme negative news will be needed to push EUR/GBP beyond 0.90/0.91 tough resistance.
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