Emerging-market currencies remained under pressure in Asian trading on Tuesday with the Indian rupee and Indonesian rupiah again attracting selling interest as local bond yields spiked higher. There was a further deterioration in risk appetite on fears over the implications of any Fed tapering which supported the yen as USD/JPY dipped to test support in the 97 area.
The dollar gained some defensive support from emerging-market vulnerability, but it was unable to gain any significant traction against European currencies as EUR/USD support held in the 1.3320 region at the European open. There was unease over potential capital outflows from US capital markets which curbed dollar demand.
A lack of liquidity was again an important feature during the holiday season and there was also a notable reluctance to maintain aggressive positioning ahead of key event risk over the next few days and weeks. In this environment, EUR/USD buyers were able to make fresh headway despite a lack of fresh economic data.
The dollar was subjected to renewed selling pressure against the Swiss franc as USD/CHF dipped to below the 0.92 level and this was significant in triggering wider selling pressure on the dollar early in the European session.
Market positioning continued to have a significant impact with retail traders still holding short EUR/USD positions which left them exposed to a short squeeze. The pair pushed higher to challenge two-month highs ahead of the European open with an attack on the key 1.34 area. An initial attack on resistance was repulsed, but pullbacks were limited and speculative players then managed to trigger stops on the next move higher which pushed the pair to a fresh high around 1.3450.
Underlying sentiment towards the UK economy was still positive given the run of favourable data. There were some underlying concerns over the underlying risk environment which tends to be a negative factor for Sterling. GBP/USD pressed towards key resistance in the 1.57 area, but was unable to break through. EUR/GBP also found support in the 0.85 area and pushed to highs around 0.8570 later in the New York session.