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By XE Market Analysis August 7, 2013 2:44 am
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    XE Market Analysis: Europe - Aug 07, 2013

    The dollar was supported amid a revival in Fed taper risk as even policy doves Evans and Lockhart suggested that a reduction in bond buying was likely to happen later this year. The pick up in the dollar was modest at best though due to market positioning and isolated moves in specific currencies. For example, EUR-USD benefited from a positive technical backdrop, leaving it very close to 1.3300, which is just a short distance from yesterday's 1.3323 top. USD-JPY also extended losses on more liquidation by nervous longs to reach 97.10. Meanwhile, AUD steadied around the 0.8950 area as a reduction in excessive short positions still kept it underpinned, though this compared with highs around 0.9000.

    [EUR, USD]
    EUR-USD saw very limited movement in Asia. A positive technical backdrop kept the downside in check despite a revival in expectations of Fed policy tapering in September. After starting the session around 1.3300 it moved between 1.3290 and 1.3315 for the most part. On Tuesday the move higher ran into very good offers by Asian sovereigns from 1.3320, while real money are camped around 1.3340-50. The EUR is pointing to higher levels in the near-term. However, economic fundamentals continue to reduce expectations of a sustained period of a EUR strength.

    [USD, JPY]
    USD-JPY gravitated to the downside as specs immediately looked to fill stops through 97.50. Good Japanese selling went through and it extended to the 97.00 area. Price action was choppy after the initial downturn and importer demand lifted it back to 97.50. However, the dollar pairing came back under pressure as the Nikkei tumbled and it entered the Asia close heavy close to 97.20. USD-JPY may have potential for much weaker levels. Potential risks include an unchanged BoJ stance and repatriation ahead of large bond redemption and coupon payments, which is now being backed up by a weak underlying trend.

    [GBP, USD]
    GBP experienced a modest correction ahead of the BoE Inflation Report. After trading close to 1.5400 it turned back to the 1.5320 area by the European open. Dollar buying was a factor on the way down, although EUR-GBP also moved up to 0.8680, which compared with 0.8620 lows on Tuesday. The BoE should reaffirm extended easy policy. However, the sustained recovery in U.K. activity also extinguished any lingering prospects of further stimulus ahead.

    [USD, CHF]
    CHF remained steady overnight. The downturn in stocks amid a revival in Fed taper risk left EUR-CHF on the heavy side just ahead of 1.2300, while USD-CHF continued to struggle around 0.9250 as weak technicals capped it from the 0.9260-70 area. There may be scope for further swissy strength on deleveraging. However, during Tuesday's session a EUR-CHF move through 1.2275 was limited as Swiss names were good buyers on dips. Similar flows are likely towards 1.2275-80 and 1.2250 if 1.2300 gives way.

    [USD, CAD]
    USD-CAD drifted higher after it bottomed out just under 1.0350 during early Europe on Tuesday. Bids that were widely noted under 1.0350 on Monday held the downside and it moved higher as stocks faltered in Asia and showed limited upside. The move out of CAD$ is also in line with the technical backdrop, which has pointed to higher levels since late last week. However, Monday's move into 1.0400-05 met very good resistance and it may struggle to sustain the uptrend unless this is overcome.

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