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The dollar tried to extend a rally on Wednesday as chatter about the possibility of higher U.S. interest rates and a sell-off in tech stocks soured risk sentiment to the benefit of the safe-haven currency.
The dollar’s bounce on Tuesday put pressure on the euro, which dropped to $1.2021 and threatened to breach important chart support in the $1.1995/1.2000 area.
“If sustained, this could suggest today’s session may be important for near-term direction, particularly if EURUSD managed to close below the key $1.20 pivot,” said Ned Rumpeltin, European head of FX strategy at TD Securities.
“We think we will need to see a daily close below the $1.20 mark to give more credence to observations that the USD tends to appreciate broadly during the month of May.”
Against a basket of currencies, the dollar was barely changed around 91.21 but away from a recent two-month low of 90.422. It needs to clear resistance at 91.425 to extend the rebound.
Rumpeltin noted that over the last 10 years, the dollar had averaged gains against each of its G10 counterparts in May.
The bounce was partly sparked by comments from U.S. Treasury Secretary Janet Yellen that rate hikes may be needed to stop the economy overheating.
Yellen later downplayed their importance, but even the slightest mention of U.S. tightening has an outsized impact in markets that have become so dependent on monetary stimulus.
The effect was apparent in large-cap tech stocks, which suffered hefty losses overnight, dragging the Nasdaq down 1.88%.
So far, Federal Reserve Chair Jerome Powell has argued the labor market is still far short of where it needs to be to start talking of tapering asset buying.
That position could be tested on Friday should the April payrolls report be as strong as some are suggesting. The median forecast is for a rise of 978,000, but estimates stretch as high as 2.1 million.
Three more Fed officials are speaking later on Wednesday providing the opportunity for further market-moving comments.
Westpac analysts pointed to expectations for a blockbuster payrolls number as a factor helping the dollar build a base.
“The Fed’s more influential dovish core will have the last word, but that won’t stop more hawkish regional Fed presidents from producing the odd tapering headline,” they said in a note, adding the dollar’s uptrend could go as far as 92 if payrolls beat the lofty expectations.
Europe’s reopening and pick up in the vaccination pace there could limit the dollar’s gains, they wrote.
Trading was limited in Asia with Japan and China on holiday, but the New Zealand dollar blipped higher to $0.7170 when local jobs data proved strong than expected.
The dollar was steady on the yen at 109.31 and again needs to break resistance at 109.61 to encourage more speculative bids.
One drag for the dollar is the U.S. trade deficit, which expanded to a record $74.4 billion in March.
“This is a medium-term weight on US dollar because the U.S. will become increasingly dependent on long term foreign investments to finance the current account deficit,” said Kim Mundy, a senior economist & currency strategist at CBA.
“As a result, we believe the recent USD downtrend has further to run.”
24-hour view: “Our expectation for EUR to ‘trade sideways’ was wrong as it plummeted to 1.1997 before closing on a soft note at 1.2013 (-0.40%). While oversold, the sharp decline in EUR has room to test the major support at 1.1975 first before stabilization can be expected. Resistance is at 1.2030 followed by 1.2050.”
Next 1-3 weeks: “We continue to hold the same view from two days ago (03 May, spot at 1.2030). As highlighted, ‘the near-term bias is tilted to the downside but EUR has to break the major support at 1.1975 before a more sustained (and sizeable) pullback can be expected’. Downward momentum has improved and a break of 1.1975 would suggest EUR could weaken to 1.1920. The current downward pressure is deemed to be intact as long as EUR does not move above 1.2080 (‘strong resistance’ level was previously at 1.2105).”
GBP/USD continues its attempts to settle above the resistance at 1.3900. If GBP/USD manages to settle above this level, it will move towards the resistance at 1.3920.
A move above the resistance at 1.3920 will open the way to the test of the resistance at 1.3950. In case GBP/USD manages to settle above this level, it will head towards the next resistance at 1.3980. A successful test of this level will open the way to the test of the resistance at 1.4000.
On the support side, the nearest support level for GBP/USD is located at the 20 EMA at 1.3870. If GBP/USD declines below the 20 EMA, it will move towards the support at the 50 EMA at 1.3845. A move below this level will push GBP/USD towards the support at 1.3800.
AUD/USD is turning south once again in the European morning, as the US dollar has jumped back on the bids amid a mild risk-aversion wave sweeping through.
After a brief pullback in the US dollar earlier in the Asian session, the bulls have regained control, as the S&P 500 futures pare gains, suggesting that the risk-on sentiment could be waning.
Markets remain concerned about growing covid worries in Asia, especially after a new local case of coronavirus was found in Sydney.
The Asian rebound in the aussie from Tuesday’s low of 0.7676 was mainly driven by a broad dollar retreat. Upbeat Australian April Markit Final Services PMI and Building Approvals data also backed the recovery in the spot to near the 0.7735 region.
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