The dollar strengthened in Europe on Monday before being shackled by a disappointing US manufacturing reading ahead of key risk events this week. Overnight, there was a stronger than expected reading for the latest Chinese manufacturing PMI release and risk appetite held firm in Asia with Nikkei gains of 2% helping to push USD/JPY to a test of resistance above 102.00.
Despite a favourable risk environment, the Australian dollar was generally vulnerable with sharp losses following a weaker than expected building approvals release. AUD/USD was unable to hold the 0.9300 level and dipped to lows below 0.9250.
The latest Euro-zone data releases did little to support the Euro and increased pressure on the ECB. There was a downward revision to the PMI manufacturing to 52.2 from a flash 52.5 with under-performance in Italy contributing to the downbeat mood.
There was a weaker than expected inflation reading in Saxony which increased speculation over a weak national release. There was fresh selling pressure on the Euro with EUR/USD dipping towards three-month lows below 1.3600 on widespread expectations that a negative ECB deposit rate would be introduced this week.
The latest CFTC positioning data recorded an increase in net speculative dollar longs for the third successive week and the overall position was at the highest level for over two months. There was also a rise in net Euro shorts, increasing the potential for a short squeeze if EUR/USD fails to break lower.
In this context, the failure to break lower to fresh lows triggered some limited covering into the New York open. The German flash inflation reading was confirmed at 0.9% for May from an expected 1.1%, but the Euro was again resilient at lower levels.
After gaining some traction, especially against commodity currencies and the yen, the dollar looked for a robust ISM reading to galvanise bullish sentiment. In the event, there was a weaker than expected figure of 53.2 from 54.9 previously which dampened bullish sentiment, especially with disappointing readings for orders and employment, although the inflation component did move higher.
After pushing to a peak above 102.25, USD/JPY was unable to gain any fresh traction, although it did hold above 102.00. Dollar momentum elsewhere was also halted as EUR/USD attempted to close above 1.3600. The dollar recovered after the ISM corrected the original figure sharply higher.
The latest UK PMI manufacturing survey was close to expectations at 57.0 from 57.3 previously. Mortgage approvals and money supply data was slightly disappointing which dampened any fresh Sterling support and the UK currency fluctuated around the 1.6750 level during the US session.