Dollar Little Changed Ahead of European Central Bank Speakers

  • Euro retraces gains, though sentiment has become less bearish
  • Pound holding advance even amid talk of Scottish referendum

ECB's Draghi Looks for Help as Economic Risks Improve

The dollar was little changed while trading lower against most of its Group-of-10 peers as traders waited to see whether speakers from the European Central Bank would fuel bullish momentum.

The Bloomberg Dollar Spot Index reversed an earlier drop that picked up its tone from last week’s close. Investors assessed that market pricing reflected three hikes by the Federal Reserve this year and left dollar bulls looking for signs from this week’s Fed meeting that four hikes may be an option for policy makers.

  • The euro’s outlook remains constructive even as it failed to sustain gains seen early in the day. The change in the ECB’s tone, together with its consideration to increase interest rates before the completion of its bond-buying program, have wrong-footed the market. Investors have been closing euro shorts vs the dollar, the Swiss franc and the yen, sending the common currency higher. Yet the move’s steepness, with the Euro Bloomberg Index rising by the most in three months, has seen some range-seeking sellers, traders in Europe noted.
  • ECB President Mario Draghi was set to speak in Frankfurt at 9:30 a.m. New York time; Vice President Constancio at 10 a.m.
  • Spot action aside, euro sentiment has become less bearish in the options market as well. Risk reversals on the one-year tenor, which largely overlooks noise from political risks across the currency bloc, show that bearish bets have reversed their course since the U.S. elections in November. They still remain in favor of dollar calls as interest rate differentials matter. On the front-end, bets are close to turning euro-bullish for the first time in four months.
  • For now, EUR/USD may remain within 1.0645-1.0700 range as a total of EU4.8b worth of expiries roll over Monday. The pair has shifted to a buy-the-dips approach with large demand seen at 1.0620-40 and circa 1.0600: traders. Leveraged demand for euro is also seen in the crosses, with order books skewed toward further buying
  • EUR/USD dropped to fresh low 1.0656 in recent trading after hitting a fresh one-month high at 1.0714, after short-term names sold into the rally
  • GBP/USD managing to hold most of day’s gains even as Scottish First Minister Nicola Sturgeon says steps for a new independence referendum will be taken as early as next week; the pound traded higher vs all of its G-10 peers; cable gained as much as 0.6% on the back of model accounts supporting it, after the pair held support from its post-October flash crash trendline
  • Interbank names look to fade any further pound strength amid May’s attempt to quell a rebellion in her own party as she tries to win the power to trigger Article 50. With the market split over the effect of the actual Brexit trigger on the pound, risk/reward is seen by some investors in offering rallies in pound crosses: traders
  • Some information comes from FX traders familiar with the transactions who asked not to be identified because they are not authorized to speak publicly
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