Dollar Enters Sideways Trading Mode as Bears Take a Step Back

  • Pound supported by talk on trade deal before Brexit trigger
  • Risk off gains traction with commodity G-10 currencies lower

Compass' Boyadjian Sees U.S. Dollar Falling Further

The greenback consolidated on Tuesday as dollar bears adopted a more subtle approach after Monday’s reversal in Trump-reflation trades.

Investors with short dollar positions across the board took profit after the London open, after dollar-yen closed on Monday above 110.63, the low of the previous two days. Fast money accounts also stepped in to offer support to the greenback as they initiated fresh longs, according to Europe-based foreign-currency traders. The Dollar Index swung between gains and losses on thin volumes overall, with its momentum partially driven by the rand’s steep drop for a second day.

The dollar is technically setting the stage for a rebound on the back of its recent drop going too far, too fast. Positioning is much lighter after the latest washout, the traders said, who asked not to be identified as they aren’t authorized to speak publicly. With selling momentum easing and extended negativity already priced in, the Dollar Index could pare part of its March losses.

  • The pound rose by as much as 0.3% to 1.2596. It reversed early losses to take out offers above 1.2570, with more seen at 1.2650-70, traders said
    • A day before U.K. Prime Minister Theresa May opens two years of talks with the EU, a report that the government will step back from its threat to leave without a trade deal if talks break down gave comfort to pound bulls. Support also came from Brexit Secretary David Davis’ comment that the nation’s bill for Brexit will be “nothing like’’ the figures that EU officials have indicated
  • NZD, AUD and CAD were the main under-performers, a sign that risk-off momentum has not evaporated fully
    • Drop in iron ore prices sent the Aussie lower a sixth day, on its longest losing streak since July 2015; AUD/USD dropped below 0.7600 support as its 55-DMA succumbed to selling pressure for the first time in two weeks
  • EUR/USD orbited the 1.0850 level, where leveraged names had bids at place; buying interest extends all the way to 1.0770-80, with stops seen below 1.0760 and above 1.0910, traders said
    • Demand on a hedging basis picked up for vanilla EUR puts expiring in a week’s time; the volatility smile on the tenors steepened for low delta puts, while it remained largely unchanged further down the curve
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