The euro was among the strongest performers last week, riding on stronger risk appetite as Federal Reserve officials continue to play down any tapering of its record stimulus this year.
At the start of the week, we saw continued strength by the single currency but gains were limited as investors hoped for a strong ZEW report before driving it higher.
The dollar was under pressure at the start of the week, continuing where it left off on Friday. The Dollar Index (DXY) eased lower and touched nearly a two-week low as expectations for tapering in December subsided.
Forex investors eyeing a strong ZEW report from the eurozone and the area’s largest economy were left disappointed on Tuesday, as the current situations survey from Germany missed the consensus and actually fell from the previous month. Despite better than expected ZEW expectations readings form both Germany and the eurozone, EUR/USD gains were capped at 1.3543 by the time of writing and retreated below the 1.35 mark.
Against the yen, the dollar eased for a second consecutive day after hitting a two-month peak last Friday. USD/JPY touched 100.43 on Friday but slipped back to 99.57 on Tuesday amid speculation that top Fed policymakers, including Chairman Ben Bernanke, will reiterate that economic growth is not yet sufficient to warrant any scaling back from quantitative easing.
The greenback’s demise was halted, however, by friendly remarks from New York Fed President William Dudley, who said he was hopeful about the economy, given the recent labour market improvements and better economic growth in the third quarter.
He did not, however, point at any changes in policy, which kept any hopes of a dollar rally in check.
Last week, at her Senate confirmation hearing, Chairman nominee Janet Yellen indicated that there would be no changes to monetary policy in the near-future and she would press on with more stimulus until she saw a robust recovery. She went on to minimise the risks that the current policy is inflating asset bubbles. Despite acknowledging the fact that the record pace of asset purchases may not last forever, markets interpreted her as reinforcing her dovish stance.
Before Yellen’s hearing, investor sentiment was darkened by speculation that the US Central Bank will start to taper as early as December and put an end to cheap cash in the markets, which was buoying a global equity and commodity rally. The greenback surged as Treasury yields rose, while Wall Street shares and other global equity markets slipped from all-time highs.
The Dollar Index rose to above 81 earlier in the month, to its highest since mid-September.
Following the hearing and the current vice-chair’s remarks, risk appetite surged with global shares, emerging markets, commodities and higher-yielding currencies rallying once again. Treasury yields eased dragging the greenback lower. Many analysts still believe that Fed tapering remains the market’s obsession and forex traders will look at economic data from the world’s largest economy.
Minutes from the Fed’s last FOMC meeting (released yesterday) will provide useful hints on the next policy direction policymakers will take.
The dollar was also hurt by speculation that the People’s Bank of China may widen its trading band for the yuan which may lead to more gains against the buck.
Governor Zhou Xiaochuan said on Tuesday, that China will put an end to normal intervention in the currency market, but did not give a timeframe.
The British pound slid for a second straight day against the euro and the dollar on Tuesday, after an agency said that Britain’s property market may be facing a potential bubble despite increasing its growth forecasts for Britain’s economy. UK government bond yields rose for the first time in over a week as bonds ended a five-day winning streak. GBP/USD slipped to 1.6059 while EUR/GBP rose to 0.8404.
The Aussie was the biggest gainer so far in the week. The Australian dollar rose after minutes from the last Reserve Bank of Australia meeting were published.
Despite keeping a slightly dovish bias, the RBA gave no indication that they will ease in the near-future. AUD/USD hit 0.9447 on Tuesday.
Upcoming FX key events:
Today: EZ flash PMI, US PPI & US Philadelphia Fed Index.
Tomorrow: German Ifo & Canadian CPI.
Technical key points:
EUR/USD is bullish, target 1.3870, key reversal point 1.3300. EUR/GBP is neutral. USD/JPY is bullish, target 103.70, key reversal point 92.50. GBP/USD is bullish, target 1.6400, key reversal point 1.5700. USD/CHF is neutral. AUD/USD is bullish, target 0.9900, key reversal point 0.8850. NZD/USD is neutral.
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Emman Xuereb is a trader at RTFX Ltd.