Forex today: US traders clean up the mess returning from holidays

Forex today had US traders returning to their desks to clean up a mess left behind by a weaker dollar and contradicting political and policy sentiment.

The DXY was closing NY at 90.4110 after opening at 90.48 having traded in a day's range of between 90.3370 and 90.8260. US yields rose to 2.55% from 2.52% on the back of softer yields in Europe (Bunds 56bps, 10yr Gilts 1.30%). This was led by subdued German and Italian inflation and headlines that the ECB is unlikely to drop its pledge to keep buying bonds until inflation heads to target. Equity markets had a positive session too, but commodity prices came off again led by oil and soft commodities. 

Analysts at ANZ explained that the dollar was pausing and helped by comments from Japanese FM Aso that sudden moves in currencies are a problem. "This was backed up by ECB’s Villeroy saying the recent euro increase is a source of uncertainty and requires monitoring because of its possible downward effects on imported prices. The differing comments from ECB’s Hansson’s yesterday highlighted a clear difference of opinion on the governing council, which may become amplified in coming weeks," the analysts at ANZ explained further. 

EUR/USD is subsequently under the spotlight ahead of next week's ECB presser held on the 25th of this month. Eyes will also be on the SPD in Germany that is meeting on 21st January where investors will eagerly await to see if they decide to progress with coalition talks in Germany.  The single currency traded between a wide range of  1.2195/2285.

As for cable, the pound dug itself out of a hole left after UK Dec CPI was down a touch to 3% vs +3.1% in November and closed back above the 10-4hr SMA at 1.3785. Sterling traders shrugged off the headline data and instead concentrated on producer prices, where input prices slipped more than expected while output prices were firmer than expected. 

The dollar was stabilizing vs the yen after approaching 110.30 on Monday after Kuroda reiterated his commitment in Asia to continue to pursue policies that will push inflation toward the 2% target. Finance Minister Aso also spoke and against excess moves in exchange rates.  USD/JPY traded between 110.24/98, closing at 110.37.  

AUD/USD was consolidating between  0.7936/75 and Kiwi between 0.7258/07. USD/CAD was testing territory below 1.24 regardless of oil dropping in profit-taking from a strong rally of speculative bids with Brent leading the way on Tuesday. 

Key events ahead

Analysts at Westpac noted the key events ahead as follows:

"Westpac-MI consumer sentiment will be the focus in Australia today. The survey ended 2017 by rising 3.6% in December to 103.3 – above average and meaning optimists outnumber pessimists. Note the headline measure is adjusted to remove a regular January ‘holiday’ boost circa 4pts. November housing finance data is also due. It is expected to show a decline circa 1% as 2017’s macroprudential policy changes continue to affect loan activity.

In the northern hemisphere, the Bank of Canada’s January policy meeting will be the prime focus, with a hike anticipated. Following the release of the final Euro Area CPI reading for December (1.4%yr in the flash release), ECB Council Member Nowotny’s address will be closely watched for any shift in tone regarding the stance of policy. Chicago Fed President Evans is also due to participate in a panel discussion. "  

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