FX Market Summary 07-28-2014: Dollar Bulls Face Anxious Wait

The dollar was unable to extend gains on Monday with markets in a wait-and-see mode ahead of key economic and risk events later this week. The Nikkei index held firm with a move to six-month highs which tended to curb defensive yen demand to some extent, although the impact was limited. The Japanese currency was still broadly resilient despite potential adverse influences with USD/JPY trapped below 102.0 while EUR/JPY held below 137.0.

The latest CFTC positioning data recorded a significant increase in net speculative dollar longs while there was a sharp increase in Euro shorts to over 88,000 in the latest week. This positioning, although not at extreme levels, will certainly maintain the potential for a sharp corrective Euro rebound, especially if bulls can hold near-term support levels.

There was a lack of fresh incentives during the European session, especially with major US events later this week. EUR/USD managed to find some support above the 1.3420 level with the 200-week DMA providing some additional steel even though underlying Euro sentiment remained negative.

GBP/USD drew some support from the ability to hold support in the 1.6950 area last week and was also due a limited correction after a sequence of daily falls last week. There was still a cautious tone over any potential buying with reduced conviction surrounding the possibility of a near-term Bank of England monetary tightening.

The Federal Reserve policy meeting and Wednesday’s statement will be very important with markets anticipating a more hawkish flavour. Advance GDP data will inevitably be scrutinised very carefully earlier on Wednesday, especially after the shock first-quarter contraction of close to 3%. The pivotal employment data will then be released on Friday.

US data releases provided no major market impetus with the Markit flash PMI services index unchanged at 61.0 for the latest month. There was some evidence of weakening price pressures in the data which will offer comfort to Fed doves. There was also a slightly weaker than expected figure for pending home sales while there was a stronger than expected reading for the Dallas PMI index as the US monetary-policy debate remained a key focus.

EUR/USD was unable to regain the 1.3450 level and consolidated around 1.3435 later in the European session. GBP/USD briefly touched the 1.7000 level before hitting increased supply.

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