Dollar Pares Loss, Euro Drops Toward 200-Day Moving Average

  • ECB’s Draghi says outlook improved, not the time to talk taper
  • GBP drops to low after test of 1.3000 as BOE meeting looms

The Bloomberg dollar index nursed slight losses in a subdued trading session as focus shifted away from the greenback, with markets seeking fresh drivers after position rebalancing following the French presidential vote appeared to have run its course.

Before a Bank of England policy meeting Thursday and U.S. inflation data set for release Thursday and Friday, traders sought to frame fresh strategies. European Central Bank head Mario Draghi said that the euro-area economy has improved, though it’s too soon to declare victory, with inflation and wage pressures remaining subdued. Draghi’s comment that the time isn’t right to discuss tapering stimulus may have provided a lingering weight on the euro.

  • The decision by President Trump to fire the FBI director Tuesday had no immediate FX impact as traders tried to assess the implications for fiscal stimulus and the rest of the president’s agenda
  • With the Fed in a self-described data-dependent mode, traders will parse this week’s inflation reports for impact on the timing of the next rate hike, with markets assigning a high probability of a June increase. Boston Fed President Eric Rosengren said three rate increases over the rest of the year is “reasonable” if forecasts hold, and policy makers should consider shrinking the central bank’s $4.5t portfolio after one more hike. Rosengren voted on FOMC in 2016 and doesn’t vote again until 2019
  • EUR/USD was trading near a fresh low of ~1.0853, allowing the Bloomberg dollar index to pare losses of more than 0.2%; flows in the drop were described as light. Bids are positioned under 1.0850 and extend to 1.0800 and are likely to cushion the move, traders in Europe and London said. EUR selling was seen from model-driven funds earlier, with some of that tied to EUR/GBP. Traders continue to be wary of the EUR as it approaches the 1.0820 area that was the opening level after the first round of French presidential voting. Stop-loss selling may be seen on a break of that level, traders said
  • USD/JPY was supported by higher UST yields as it rose to a new session high at 114.37, extending a rebound from its overnight low near 113.60. Flows are exceptionally muted, traders from London to New York said; USD/JPY lift may have also been due to some weak shorts throwing in the towel as the pair rebounded from its North Korea-inspired drop late in Tuesday’s session. Offers were absorbed ahead of 114.15, further supply is positioned about a half-yen higher
  • GBP rose to near its highest vs the USD since September, trading to 1.2988 before dropping to a new session low 1.2928 ; early demand for GBP/JPY fueled the rise to near 1.3000 before offers capped the pair, said traders familiar with the transactions who asked not to be identified because they are not authorized to speak publicly. The BOE is expected to keep rates and policies on hold Thursday; focus may be on the inflation report and the vote count after the committee voted 8-1 in March in favor of keeping rates steady even as the U.K. sees a pickup in inflation
    • BofA analysts led by Robert Wood say there’s little reason for a hawkish BOE inflation report as “1Q growth was weak and the consumer looks wobbly”; the report is unlikely to “meaningfully shift the dial” for the pound
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