Dollar Reverses Drop Before Fed Minutes, Data as Risk-Off Fades

  • Yen touches seven-week low as geopolitics takes a step back
  • Sterling’s three-day run lower faded on BOE hawkish commentary

Nomura Sees Fed Announcing Balance Sheet Tapering Sept.

The Bloomberg Dollar Spot Index reversed early losses on a move fueled by the greenback’s rally versus the yen as risk sentiment improved across markets.

As Treasuries erased their initial drop, the dollar rose to its strongest level versus the yen since May 16 at 113.59, on a firm rebound from its 112.83 Asia-session low. Weakness early on came as geopolitical concerns were at the forefront of traders’ minds and demand for safer assets prevailed. Most European stock markets started on a positive note, supporting a rally in euro-yen, before erasing their gains.

Strong exporter supply near 113.50 caused the dollar’s rally versus the Japanese currency to lose momentum, according to traders in Europe and Asia. A close above the daily trendline resistance at 113.36 may open room for a test of the May 11 high at 114.37 as momentum studies signaled the move has legs. DeMark TD Sequential offered a note of caution as a sell setup series might be completed on Thursday, suggesting short-term losses.

Investors will focus on U.S. durable goods and factory orders data before the release of the minutes of the Federal Reserve’s June meeting. While traders will keep an eye on any signs regarding the timing of balance sheet reduction, as that may delay the timing of the next rate hike, they will also look for clues on whether an increased number of policy makers were concerned over poor inflation growth.

Should most Fed officials reflect Chair Janet Yellen’s view that they can look past inflation numbers and note improved financial conditions, and given the latest comments by policy makers over equity market strength, investors may need to move closer to the Fed’s dot plot.

  • Dollar’s broad recovery weighed on the euro, which failed to hang on to gains and traded as low as 1.1318 after European Central Bank Executive Board Member Benoit Coeure’s comments that the ECB hasn’t discussed policy changes yet
    • These comments add onto recent ones that came as an attempt to ease the effect of Mario Draghi’s speech in Portugal, which was seen as hawkish, and possibly a game changer as far as ECB monetary policy is concerned
    • North Korea troubles, U.S. data and G-20 summit this week may keep vol term structure inverted
  • U.K. services PMI came close to expectations and had little effect on sterling, which remained defensive
    • Cable was little changed at 1.2919 versus a 1.2894 day low; demand from leveraged investors to fade dips is strong on increased rate-hike odds, said the traders, who asked not to be identified as they weren’t authorized to speak publicly
    • BOE’s Saunders says U.K. households should prepare for tighter policy “at some point” in an interview with the Guardian newspaper published on its website
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