Short-Covering Ahead of ECB Meeting Reverses EUR/USD

The U.S. Dollar gave back earlier profits to finish lower on Tuesday with most of the loss attributed to a rebound in the Euro. Although the 10-year Treasury yield breached the psychologically significant barrier of 3 percent, the dollar showed a limited reaction to the move with most of the impact of higher rates taking place on Monday.

June U.S. Dollar Index futures settled at 90.537, down 0.168 or -0.19%.

Early in the session, the Euro was driven below its two-month low hit on Monday. Growing concerns that an improving U.S. economy coupled with rising U.S. Treasury yields weighed on the single currency. Most of the selling pressure was blamed on hedge fund liquidation. Earlier in the month, it had been reported that hedge funds had amassed record long positions in the Euro.

The Euro was also led lower on lingering worries that European Central Bank policymakers may signal a more cautious stance at a policy meeting on Thursday.

The EUR/USD mounted a comeback throughout the session as buyers came in to defend the annual low reached in January. The inability to break the Euro through this low may have fueled Tuesday’s short-covering rally. Position-squaring ahead of Thursday’s ECB monetary policy announcement and Friday’s U.S. GDP report also fueled the price recovery.

Since the Euro is 57 percent of the dollar index, any sizable rally tends to put pressure on the index.

U.S. Economic Data

U.S. economic data was relatively strong on Tuesday. Housing market reports showed better-than-expected results. The Home Price Index rose 0.6% versus a 0.5% estimate. The S&P/CS Composite-20 HPI rose 6.8% versus a 6.3% forecast. New Home Sales came in at 694K, beating the 625K forecast. The previous month was revised higher to 667K.

The Conference Board’s Consumer Confidence survey came in at 128.7. However, the previous month was revised lower to 127.0.

Finally, the Richmond Manufacturing Index posted a reading of -3, down substantially from the previously reported 15 and the 16 estimate.

U.S. Treasury Markets

The yield on the benchmark 10-year Treasury note hit the key psychological level of 3 percent Tuesday for the first time since January 2014. The yield edged past 3 percent shortly after the stock market opening, before wiggling slightly downward throughout the session.

The yield on the two-year Treasury note also reached a multiyear high, topping 2.5 percent for the first time since September 2008.