The US dollar stages a selective rally

Dollar gains against euro and pound

Despite US yields easing overnight, the dollar index staged a sharp rebound, rising 0.23% to 93.82, before climbing to 93.90 in Asian trading. A look under the bonnet though, reveals the US dollar rally was very much tilted to the lower interest rates forever currencies, namely, the euro, Swiss franc and Japanese yen. Sterling and the Australasians held steady overnight. The dollar index is likely to struggle above 94.00 this week, especially if big-tech earnings outperform. For now, it looks like the index will trade in a 93.50 to 94.20 range ahead of next week’s FOMC.

The EUR/USD has sunk back to 1.1600 today, but its exile in the broader 1.1550 to 1.1560 range will continue into the ECB on Thursday. An ECB that maintains its dovish longer-term inflation projections on Thursday will likely be the catalyst for another sell-off. Sterling is trading at 1.3765 today and has run into some serious headwinds ahead of 1.3850. The BoE hike trade becoming very crowded and perhaps overdone Nevertheless, only a close below 1.3700 changes the bullish outlook.

AUD/USD and NZD/USD shrugged off US dollar strength elsewhere to remain steady at 0.7695 and 0.7165 overnight, before gaining 15 points each this morning. China’s property nerves have had zero impact on the Australasians whose fate is very much tied to a global sentiment that is Wall Street-centric. If US earnings continue to provide good news, their downside is limited, although data releases tomorrow could see some intra-day volatility.

Asian currencies remain quiet with the PBOC anchoring volatility with another neutral US/CNY fixing today. Like the Australasians, Asia FX is riding the US earnings sentiment wave and that is unlikely to change ahead of next week’s FOMC.

With over 1000 companies announcing earnings this week in the US, we should be past peak earnings by Friday. I expect to see that sentiment ease into next week and for the US dollar rally to resume with vigour, as the FOMC meeting approaches mid-week and the reality of the start of the Fed taper bites once again.

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