The US dollar holds firm

US dollar recovers losses from soft CPI

Although the US dollar dipped on the US inflation miss, the greenback quickly recovered its losses with the dollar index closing almost unchanged at 91.63, where it remains in Asia. The US dollar’s strength even as bond yields eased is strongly suggesting that risk-aversion flows are in play as sentiment globally sours. That should also benefit the Swiss franc and Japanese yen over the rest of the week.

Elsewhere, EUR/USD’s rally quickly petered out leaving it unchanged at 1.1800 in Asia. The 1.1750 and 1.1850 levels remain the ones to watch for the euro’s next directional move. GBP/USD has risen just 10 pips to 1.3815 on the just-released UK inflation, core inflation and PPI data. The MoM and YoY metrics have all come in much higher with inflation alive and well in Her Majesty’s kingdom. The statistics office, like the BoE, has urged caution about the numbers, saying inflation is temporary. Looking at natural gas prices, I am not so sure. The definition of temporary is increasing differently to different people.

GBP/USD failed ahead of its 100-day moving average (DMA) at 1.3915 overnight, before plummeting to 1.3805 close overnight. Sterling is looking more vulnerable than the euro at the moment, and support at 1.3790 really needs to hold to avoid a retest of 1.3700. Given the reaction to the UK inflation data, that may be false hope for bullish sterling traders.

Perhaps the biggest signal that risk sentiment remains fragile this week is the performance of both the Australian and New Zealand dollars overnight. Both Antipodeans finished lower overnight and did not rally temporarily in the posy-US-inflation dollar sell-off. AUD/USD and NZD/USD have retreated once again in Asia, falling 0.10% to 0.7320 and 0.7095 with the Kiwi looking especially vulnerable if 0.7075 breaks. Until positive momentum returns to AUD and NZD, it will be hard to call a top in the greenback’s rally overall.

Asian currencies have barely reacted to the China data today, being mostly unchanged, having retreated only slightly on US dollar strength overnight. The best I can surmise is that AsiaFX is determined to remain in a holding pattern until next week’s FOMC meeting. The low inflation print from the US overnight should have been bullish for Asian currencies, pushing back as it did, the timeline for the Fed taper. Instead, Asian currencies faded slightly implying that lower AsiaFX is the path of least resistance in the days ahead.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is OANDA’s senior market analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia as well as in leading print publications including the New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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