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The dollar clung to a recent bounce on Monday as investors made a cautious start to a week crammed with central bank meetings and big-ticket U.S. economic data, looking for clues on the outlook for global inflation and for policymakers’ response.
Asia trade was thinned by public holidays in Japan and China that also kept a lid on volatility, leaving the greenback where it settled after a Friday leap. It steadied at $1.2029 per euro and bought 109.28 yen.
The dollar index, measured against six major currencies, held at 91.242. The index dropped 2% through April as a positive view of global recovery prospects lifted trade-exposed currencies at the dollar’s expense.
“We expect the dollar to trend lower because of the improving global economic outlook,” said Commonwealth Bank of Australia analyst Kim Mundy in an emailed note, with U.S. import demand also likely to support exporters’ currencies.
“Nevertheless,” she said “the risk of short bouts of dollar strength remain if solid data push U.S. Treasury yields materially higher.”
The Australian and New Zealand dollars both rose though April, but dropped on Friday when strong U.S. consumption figures boosted the U.S. currency.
The Aussie rose 0.1% $0.7724 on Monday to trade just above its 20-day moving average at $0.7714, while the kiwi edged 0.2% higher to $0.7174, also just above its 20-day moving average. Sterling steadied at $1.3825.
U.S. manufacturing surveys are due on Wednesday followed by crucial April labor market numbers on Friday.
Forecasts are that 978,000 jobs were created in the month. However analysts say the market response to a surprise either way may be hard to guess, as investors have begun to fret that strong data may prompt central bankers to taper their support.
“The risk is for a hotter number,” said Chris Weston, head of research at broker Pepperstone in Melbourne.
“But will good numbers lead to a broad risk-off vibe, as traders’ price in higher rate expectations, and the dollar rallies,” he added. “I suspect we’re getting to a point where really good data could start to become bad for markets.”
Dallas Fed President Robert Kaplan caused a stir on Friday by calling for beginning the conversation about tapering, although Federal Reserve Chair Jerome Powell has been clear that he is likely to be patient.
Powell is due to speak later on Monday and will be followed by a raft of Fed officials this week. Central bank policy meetings are also scheduled this week in Australia, Britain and Norway.
In Australia, no policy changes are expected on Tuesday although traders will look to a speech by deputy Reserve Bank of Australia governor Guy Debelle on Thursday for insight into the bank’s thinking around its bond purchases outlook.
Asset purchases are likewise the focus when the Bank of England meets on Thursday, as well as perhaps an upgrade of its economic outlook, while Norges Bank — which projects hiking rates this year — is expected to stick with its hawkish tone.
According to FX Strategists at UOB Group, Cable’s downside could extend to the 1.3750 region in the short-term horizon.
24-hour view: “We expected GBP to ‘retest the 1.3980 level first before a more sizeable pullback can be expected’ last Friday. Our view was wrong as GBP plummeted and cracked several support levels with ease (low has been 1.3803). The swift and sharp drop appears to be running ahead of itself but there is no sign of stabilization just yet. From here, GBP could test the support at 1.3790 first before stabilization can be expected. The next support at 1.3750 is likely ‘safe’ for today. Resistance is at 1.3845 followed by 1.3870.”
Next 1-3 weeks: “Our view from last Thursday (29 Apr, spot at 1.3950) where GBP ‘is expected to trade with an upward bias towards 1.4010’ is proven incorrect as GBP plunged through our ‘strong support’ level at 1.3850 on Friday (low of 1.3803). The sudden and sharp drop has scope to extend to 1.3750. At this stage, a sustained decline below this level appears unlikely. The current downside bias in GBP is deemed intact unless GBP can move above the ‘strong resistance’ level at 1.3910.”
The USD/CAD pair edged higher through the early European session and climbed beyond the 1.2300 round-figure mark, hitting fresh daily tops in the last hour.
A combination of factors assisted the pair to gain some positive traction on the first day of a new trading week and move away from over three-year lows, around the 1.2265 region touched on Friday. The US dollar built on last week’s goodish rebound from the lowest level since February 26. Apart from this, a weaker tone around crude oil prices undermined the commodity-linked loonie and extended some support to the USD/CAD pair.
As investors looked past the Fed’s dovish message last week, the USD witnessed some short-covering move and was further supported by Friday’s mostly upbeat US macro releases. The US Bureau of Economic Analysis reported on Friday that the annual Core PCE Price Index accelerated to 1.8% in March from 1.4% previous. Additional details revealed that Personal Income surged surge 21.1%, while Personal Spending increases by 4.2% in March.
Meanwhile, worries that a catastrophic second wave of COVID-19 infections in India overshadowed the optimism over a strong rebound in demand across developed countries. This, in turn, acted as a headwind for the Canadian dollar and provided an additional boost to the USD/CAD pair. That said, the divergence in monetary policies adopted by the Bank of Canada and the Federal Reserve might keep a lid on any strong gains for the major.
It is worth recalling that the BoC reduced its weekly asset purchases at the April policy meeting and brought forward the guidance for the first interest rate hike to the second half of 2022. Conversely, the Fed remains firm to maintain the current accommodative monetary policy. This makes it prudent to wait for some strong follow-through buying before confirming that the USD/CAD pair might have already bottomed out in the near term.
Market participants now look forward to the US economic docket, highlighting the release of ISM Manufacturing PMI later during the early North American session. This will be followed by Fed Chair Jerome Powell’s speech, which will play a key role in influencing the USD. Apart from this, oil price dynamics and the broader market risk sentiment should allow traders to grab some short-term opportunities around the USD/CAD pair.
EUR/USD has swiftly come off its April high at 1.2150. According to Axel Rudolph, Senior FICC Technical Analyst at Commerzbank, the pair eyes the 1.1994/42 neighborhood.
EUR/USD saw no follow through on Friday and has since swiftly sold off
“Dips lower are indicated to be contained by the 55-day ma at 1.1967 and the 200-day ma at 1.1942.”
“Initial support sits at the 1.1994 April 22 low.”
“Above 1.2150, we look for gains to 1.2210/43, the 78.6% retracement of the move seen this year and the February high and then 1.2349 the 2021 high.”
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