Short covering was initially the dominant influence on Monday as EUR/USD rallied to highs near 1.3550 with the Euro gaining support from the ability to regain the 1.3500 level on Friday after briefly hitting five-month lows.
The latest CFTC positioning data recorded a marginal decline in net speculative dollar longs while net Euro shorts increased slightly. Although this maintains the possibility of a short squeeze if markets can’t sustain downside moves, there was no major change in market dynamics within the data.
There were also no major risk events over the weekend with markets still watching the Ukraine situation closely as the US and EU states looked to increase pressure on Russian President Putin.
Tokyo markets were closed on Monday which dampened activity significantly as caution continued to prevail. There were quoted remarks from a Bank of Japan official that was more optimistic surrounding the potential for higher inflation which would lessen the potential for further central-bank action. The yen maintained a firm tone despite modest gains in Asian equity markets with USD/JPY back to the 101.20 area with key support in the 100.80 area.
There was a lack of fresh incentives during the European session with a decline in Italian industrial orders the only minor data release on offer while the Bundesbank remained cautious over growth prospects in its latest monthly bulletin. After being rejected near 1.3550, EUR/USD dipped to lows near 1.3510 with no serious attempt on key support levels.
There were no major US economic releases on Monday as market conditions remained subdued. The latest US inflation data will be watched closely on Tuesday as a higher than expected release would reinforce pressure for the Fed to move to a more hawkish policy tone.
The latest UK Rightmove data recorded a decline in house prices for July and a slowdown in the annual increase to 6.5% from 7.7% previously, increasing speculation that the sector could be slowing. There were some doubts surrounding the resilience of retail sales as consumer confidence edged lower and Sterling remained prone to limited profit taking. EUR/GBP was able to hold above the 0.7900 level as GBP/USD again edged lower towards 1.7050.