USD in Recovery Mode, But For How Long, with Eurozone Inflation in Focus

The question for the week is whether the U.S Dollar can bounce back from its current woes and 10-month lows, as major currencies begin to move to levels perhaps a little disconcerting from central bank perspectives.

Strong macroeconomic data out of China through the Asian session today was a boost for emerging market currencies, which have already been on the rise in recent days at the expense of the U.S Dollar, with appetite for the Yen easing through the Asian session as the world’s 2^nd largest economy continues to deliver.

Tomorrow’s RBA meeting minutes will certainly of interest following the AUD’s 3% rise last week, though the recent assent in the AUD comes after the RBA meeting last month, AUD strength having been cited as a concern within a string of statements and minutes and one of the reasons for the RBA to likely hold back on any shift in monetary policy over the near-term, trade continuing to be a key contributor to the Australian economy.

With macroeconomic data on the lighter side for the day ahead, it will be hard for the U.S Dollar to shake off the melancholy, with the Dollar’s upside through the Asian session coming more from support levels following the sharp declines through the early part of July, than a shift in market sentiment towards FED monetary policy and the U.S economy, with Friday’s inflation and retail sales figures having been a disappointment.

Stats out of the U.S this afternoon are limited to July’s New York State manufacturing numbers, which are expected to show an easing from the surge in productivity last month, with only better than expected figures likely to spur appetite for the Dollar, the markets having little else to focus on other than noise from Capitol Hill and the Healthcare Bill, which is still doing its rounds.

Over in Europe, there are no material stats out of the UK to speak of, with the pound holding onto $1.30 levels ahead of tomorrow’s June inflation figures and a BoE Governor speech tomorrow afternoon, which is likely to garner plenty of attention following mixed data out of the UK of late that has added some confusion on where the BoE is likely to sit on monetary policy ahead of the August MPC meeting.

For the EUR, the markets will have June’s finalized inflation figures to slice and dice this morning, any improved numbers likely to support further gains in the EUR ahead of Thursday’s ECB monetary policy decision and press conference, the markets now expecting the ECB to begin talking with more conviction of a tapering to the asset purchasing program as a minimum, though there could be a surprise for the markets come Thursday, should the ECB decide to move early.

At the time of the report, the Dollar Spot Index was up 0.10% at 95.252, with a 0.11% fall in the EUR supporting the Dollar Spot Index, while the Pound eased back from an intraday high $1.3117, flat on the day following a rebound going into the European open, sentiment towards a hawkish BoE providing the necessary support.

The EUR will be in the hands of today’s figures and how the markets expect the ECB to interpret the numbers, though with Draghi having shifted on his views on inflation, we would expect the EUR to recover from its intraday losses through the Asian session, with the Dollar likely to be reliant on support through to the close, any upside coming off the back of weakness in the EUR rather and the dip buying that we have become accustomed to through the first half of the year.

For the pound, we will likely see sterling tread water for the day following sizeable gains off the back of last week’s employment figures and a choppy stat to the day, with focus now firmly on whether the MPC will make a move rather than whether the UK economy is going to bounce in the 2^nd quarter, inflation being the BoE’s biggest hurdle over the near-term.