The latest CFTC positioning data recorded an increase in net long speculative dollar positions to the highest level in six weeks and the third successive increase in longs which was surprising given the sharp dollar shake-out which looked to have taken place over the past 10 days. This bias towards long dollar positions in all major currencies will make it more difficult for the US currency to make further headway, especially with sentiment already generally bullish.
The Japanese Upper-House election results confirmed that Abe had won a comfortable victory which, following the crushing Lower-house victory in December, gives the government a majority in both houses. The opposition, therefore, will not be able to block economic legislation. The LDP did, however, fall short of a two-thirds majority which will make it difficult to enact any constitutional changes and this did disappoint the more optimistic forecasts. Markets had also broadly priced in an Abe victory and the yen proved resilient despite a brief spike weaker. After initially failing to break above 101, there was fresh dollar selling pressure and USD/JPY dipped to test support below 100.
There was some relief that the Portuguese government survived the weekend intact with the President effectively withdrawing his demands for a coalition of national unity and the existing administration will continue for now. There was a sharp drop in Portuguese bond yields which had some impact in underpinning the Euro.
The main story was wider dollar selling pressure rather than strong support for the European pairs, but there was still a significant move. EUR/USD drew support from the ability to hold support levels near 1.31 late last week and moved to test resistance levels above 1.3150 as technical factors dominated for much of the session.
The latest US existing home sales data was weaker than expected with a decline to an annualised rate of 5.08mn for June from a revised 5.14mn previously. Although by no means a disaster, the weaker than expected release continued to take some shine off the dollar with the currency subjected to renewed selling pressure following the data. In this environment, EUR/USD moved to test resistance above 1.32 for the first time since Fed Chairman Bernanke’s speech 10 days ago as USD/JPY dipped to below 99.50.
Sterling continued to gain some support from expectations that there would be a solid second-quarter GDP reading later this week and it managed to hold its ground against a generally firm Euro. In this environment, GBP/USD was able to post substantive gains as it broke above the 1.53 barrier and pushed to a high above 1.5370.