FX Market Summary 01-07-2014: Dollar Fights Back

Overnight, Yellen was confirmed by the Senate as the next Federal Reserve Chairman, although the vote in favour was the narrowest on record and broadly along party lines which continued to indicate polarised political views surrounding the monetary process.

The latest CFTC positioning data recorded a decline to net long dollar positions to a six-week low and a continued long Euro position which should tend to limit dollar selling pressure against European currencies and Asian action was relatively subdued with a solid dollar tone.

German data was generally favourable with a 1.5% gain for retail sales and a decline in unemployment for December. The latest euro-zone data recorded a decline in consumer inflation to 0.8% for December’s flash reading from 0.9% the previous month, maintaining unease surrounding potential deflation in the region. The data will also maintain pressure on the ECB for more aggressive policies to expand demand, which will give added importance to this Thursday’s council meeting.

Immediate Euro reaction was subdued with the currency actually tending to gain ground despite the data. Technical considerations were important with short-term players looking to take advantage of EUR/USD’s ability to hold 1.36 support and pushed it to test the 1.3650 resistance area in an effort to trigger stops above.

The latest US trade data was again substantially better than expected with the November deficit declining to US$34.2bn from a revised US$39.3bn the previous month as exports hit record levels and imports edged lower. The deficit as a whole was the lowest since October 2009, maintaining the overall improving trend and reducing longer-term structural drag on the dollar.

The US currency was also able to secure fresh momentum against all major currencies during the New York session with a move back above 104.50 against the yen. There were also sharp gains against the commodity currencies with AUD/USD testing the 0.89 support area while USD/CAD was a big winner on the day with a move to above 1.0750 following a very poor Canadian PMI reading.

In the face of wider US gains, European currencies also tended to buckle later in New York. EUR/USD retreated sharply to test support in the 1.36 area, discouraged by failure to break resistance. USD/CHF pushed to highs near 0.91 while GBP/USD again lost a foothold above 1.64 in choppy trading conditions.

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