The dollar was under pressure to start off the week, picking up where it had left off the previous week. Economic data published in recent weeks from the world’s largest economy has been somewhat disap-pointing, which has cast doubt on the pace of tapering by the Federal Reserve.

At the end of last week, sluggish figures from the US in contrast with improving readings from the eurozone sent the greenback to 6-week lows versus the European single currency. Data from China over the weekend and the prospects for a new reforming government in Italy pushed global stocks to more than three-and-a-half-week highs and weighed further on the buck.

A series of weak economic readings from the US, including a surprise sharp drop in manufacturing output, prompted investors to pose questions on how fast the Fed will scale back stimulus and eventually tighten monetary policy.

This led to a rebound in higher-yielding assets. Gold and emerging currencies also rallied strongly.

Higher-yielding emerging markets were suffering as US investors brought their money home in anticipation of the Fed’s tapering but rose to multi-week highs on Monday.

The greenback slipped to its lowest since the turn of the year on Monday against a basket of major currencies, and to its lowest since mid-January against the euro.

The Dollar Index (DXY) touched 79.95 on Monday and EUR/USD extended its rise to 1.3769 by Tuesday.

GDP data from Europe’s largest economies published on Friday was encouraging, giving a lift to the euro. This followed a reassuring ECB monthly report released on Thursday, which showed an improving economic outlook for the area, in contrast to mostly pessimistic views in recent months.

US markets were closed on Monday for the President’s Day.

News from Europe continued to be encouraging, as Italian President Napolitano asked center-left leader Matteo Renzi to form a new government, following Enrico Letta’s resignation last week. Optimism grew as a new government in Italy is expected to be able to push through reforms in an effort to aid growth following years of stagnation. Italy’s benchmark 10-year government bond yield fell to an eight-year low of 3.622 per cent on Monday, after Moody’s raised Italy’s rating outlook to stable from negative late on Friday.

EUR/USD is expected to continue to be driven by macroeconomic factors in the near-term. Particularly, if data from the US continues to disappoint, and news out of Europe remains reassuring, we may see the pair rise to test last year’s high in the 1.3900 region in the medium-term. The fact that the pair managed to break out of a downward trend channel, which was in place since the start of the year, also signaled more strength in the coming days.

A break above 1.3740 should pave the way to 1.3800 in the short-term. To the downside, a move below 1.3600 would give scope for more weakness.

Sterling has been on a rampage in the last few weeks. The pound hit its strongest level since November 2009 versus the dollar amid growing speculation that the Bank of England will be the first major central bank to hike interest rates. GBP/USD touched 1.6823 on Monday but retreated to 1.6655 on Tuesday, following downbeat consumer inflation numbers which showed inflation in Britain unexpectedly cooled to below the BoE’s target. Nevertheless, the British currency is expected to remain buoyant in the near to medium-term, especially since the economic recovery in Britain is now showing signs of resilience.

A daily close above 1.68 will pave the way for renewed strength for cable and send it to test the 1.69/70 levels. EUR/GBP should continue to trade along a downward channel which took shape from August of last year. Any bounces should be well capped by the upper boundary of the channel, and only a break above 0.8300 could see the pair attempt a stronger recovery higher.

On Tuesday, the yen plunged against all of its major rivals after the Bank of Japan maintained its ultra-accommodative policy and extended a special lending program to aid the economy.

Despite sounding upbeat about the economy and suggesting no further easing steps in the near-term, the BOJ raised the maximum amount of loans to 7 trillion yen from 3.5 trillion, while pushing the repayment date to four years instead of one to three.

USD/JPY soared to 102.74, wiping out most of the previous four day losses.

The dollar should continue to garner support against the yen as the respective central banks maintain diverging policies.

The pair is likely to trade side-ways in the coming weeks, between 101 and 103.50.

Upcoming FX key events:
Today: EZ PMI flash manufacturing, French CPI, US CPI & US Philadelphia Fed index.
Tomorrow: UK Retail sales, Canadian CPI & US Existing home sales.

Technical key points:
EUR/USD is neutral. EUR/GBP is bearish, target 0.8050, key reversal point 0.8600. USD/JPY is neutral. GBP/USD is bullish, target 1.6900, key reversal point 1.6250. USD/CHF is neutral. AUD/USD is neutral. NZD/USD is neutral.

Please feel free to send any comments or feedback regarding our articles on trading@rtfx.com.

Visit RTFX for additional forex news and demo trading account information.

RTFX Ltd is licensed to conduct investment services business by the MFSA. This information does not constitute advice, should not be relied on as such to enter into a transaction or for any investment decision and is provided for information purposes only.

www.rtfx.com

Emman Xuereb is a trader at RTFX Ltd.

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