Technical considerations were important Monday as markets digested sharp moves late last week. The latest CFTC positioning data continued to record a substantial net long Euro positions in excess of 70,000 contracts and the net short dollar position was at its highest level for nine months, illustrating the potential for position squeezing and rebound in the US currency seen at the end of last week.
Tokyo markets were closed for a holiday on Monday, further undermining liquidity during the Asian session, which left favourable conditions to attack stop-loss levels. The Euro briefly dipped to below 1.3450 for fresh six-week lows before finding some relief as the US currency advanced to a six-week high. USD/JPY consolidated Friday’s late gains above 98.50 without making an impression on tough resistance near 99.0.
The Euro-zone PMI manufacturing data was close to consensus and did not have a major impact with some relief that the Italian index held above 50 offset by a small decline compared with the previous month. There was also a small monthly improvement in the Sentix investor-confidence index.
ECB policy remained an extremely important focus ahead of this Thursday’s council meeting with persistent speculation that the bank would look to loosen monetary policy in order to combat deflationary pressure. There was further underlying interest in selling Euros ahead of the ECB meeting, countered by expectations of a technical correction following very steep losses over the second half of last week.
The US data releases had little impact with tensions already in evidence ahead of GDP and employment reports due later this week. Regional Fed President Bullard continued to suggest that any tapering decisions would be data dependent. Despite improvements in the labour market, he wanted to see higher inflation before cutting back on the stimulus programme.
EUR/USD moved back above the 1.35 level as correcting over-sold conditions won out in subdued conditions, but there was still significant interest in selling rallies.
The latest UK CIPS construction data was stronger than expected with a rise to 59.4 for October from 58.9 previously and this was the strongest reading for six years. The CBI also issued more upbeat forecasts for the UK outlook over the next two years which helped underpin sentiment. In this environment, GBP/USD was able to hold critical support just above the 1.59 level and rallied back towards 1.5975 as the US currency was subjected to wider profit taking.