Market activity was extremely limited on Monday with market holidays in the UK and US paralysing activity and keeping ranges extremely tight with EUR/USD trapped comfortably within a 1.2900-1.2950 range.
There was fresh volatility in Asian trading on Tuesday as the US currency initially advanced strongly against the yen with a resumption of the sharp underlying up-trend. Following sharp losses last week, the Nikkei index attracted fresh buying support which also pushed the US currency higher as US Treasury yields rose.
The dollar pushed above the 102 level against the yen and the general bullish tone dragged EUR/USD to below 1.29. Following a successful test of support, the Euro secured a limited recovery during European trading. Short-term players were also cautious over pushing the US currency stronger given the already extreme positioning. The latest IMM data recorded a further net increase in long speculative dollar positions to the highest overall level since 2008 with short Euro contracts rising to near 80,000.
In comments on Tuesday, ECB member Nowotny appeared cautious over the prospect of lowering interest rates further with a preference for more direct measures to underpin lending and the economy as a whole. Confidence in the Euro-zone outlook remained extremely fragile which limited Euro support and there was no serious test of resistance levels.
The underlying tug-of-war between longer-term dollar optimism and near-term pressure for a correction weaker swung back in the dollar’s favour during New York trading.
The US economic data releases were stronger than expected with consumer confidence rising to 76.2 for May from a revised 69 the previous month, the highest reading since February 2008 which reinforced near-term confidence surrounding consumer spending trends. There was also a stronger than expected annual increase of 10.9% in the Case-Shiller house-price index. A notable feature was again the resilience of US equity markets in the face of rising bond yields.
Although two minor US PMI indices did little to strengthen confidence with the Richmond Fed at -2 and the Dallas index at -10.5 for May, the confidence data was the catalyst in triggering renewed dollar support and there was a fresh slide in EUR/USD to the 1.2880 area. A break of support here pushed the pair to 1.2860 which brought the May low of 1.2800 back in focus.
Dollar strength was the dominant feature as the Euro was broadly stable against Sterling while the single currency advanced against both the Yen and Swiss franc. Sterling was again blocked just below the 1.5150 level against the dollar and retreated to lows below 1.5050, only 30 pips away from May lows, with no major domestic influences.