The Nikkei index advanced firmly on Monday with gains of over 2.5% which helped stabilise dollar sentiment against the yen. There was still tough resistance above 95 and USD/JPY failed to a sustain a move above this level.
Trading ranges generally were extremely narrow for much of the European session with market paralysed ahead of the critical Federal Reserve interest rate decision due on Wednesday. There was solid EUR/USD buying support on approach to the 1.33 region while resistance levels were tough to break down on approach to 1.3350.
The latest CFTC positioning data recorded a net decline in long dollar positions for the third successive week. The overall decline was still relatively modest, but there was much greater interest surrounding the Euro data. There was a net decline in short positions of close to 90% as the number of contracts fell to near 7,000 from over 50,000 the previous week, the sharpest rate of decline in over two years. Given that there could now be a net long position, there was caution over the potential for further Euro short covering which should lessen the threat of a further dollar correction weaker.
The headline US data releases were stronger than expected with the New York PMI index strengthening to 7.8 for June from -1.4 previously, although the underlying components were less favourable. The NAHB housing index was much stronger than expected with an increase to 52 from 44 previously. Significantly, this was the first reading above the 50 benchmark level for the first time since March 2006 which suggests that there has continued to be an important underlying strengthening in the housing sector which will also have a positive impact on wider dollar sentiment.
There were further concerns surrounding the Chinese growth outlook with unease over developments in the shadow banking sector highlighted in a report from ratings agency Fitch. Confidence in emerging markets remained generally fragile which provided some important net support to the dollar against commodity currencies, especially during New York trading.
Sterling was a significant focus as it challenged key resistance around 1.5750 against the dollar where there this a cluster to technical levels including the 200-week moving average. There was a further increase in house prices, the sixth monthly advance, according to the latest Rightmove data, maintaining greater optimism surrounding the housing sector and the wider economy. GBP/USD peaked just above 1.5750 before retreating towards 1.57 once again as resistance levels held.