The dollar clawed back from most of its earlier losses in U.S. trade on Thursday, boosted by safe-haven flows after U.S. lawmakers failed to make progress in fiscal relief negotiations.
EUR/USD had already begun losing steam after an EU Commission paper highlighted how euro strength could hurt growth, slow inflation and put more pressure on the ECB nB5N28S02L.
Then came news that U.S. House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin remained far from agreement on COVID-19 relief in several key areas after a phone discussion failed to bridge the divide nL1N2GS0X8.
Following the news, EUR/USD retreated further from the day's peak of 1.1770.
Its rally had been capped by resistance from the converged 21- and 55-day moving averages at 1.1774, with the downtrend line from September's high nearby at 1.1790.
Underwhelming U.S. data had also forced EUR/USD to trim its gains, as did weakening stocks.
Sharp drops in oil and copper, which should be in demand if the global economy is mending better than expected, contributed to unease about the reflation trades that the dollar has been sold to fund.
The dollar index found support at its converging 21- and 55-DMAs, as well as the point where prices broke above their inverted head-and-shoulders neckline in September nL1N2GS0ZS.
Sterling provided a spectacle of volatility, rising to the 38.2% Fibo of September's slide, 1.2979, before tumbling back to 1.2862, ahead of the earlier session and London morning low at 1.2819, on conflicting reports about EU-UK trade talks nL1N2GS0RM and legal action by the EU against the UK nL8N2GS1RC.
Further clouding the pound and euro outlooks are ongoing COVID-19 outbreaks and fears of economically debilitating lockdowns nL8N2GR496nL8N2GS64K.
USD/JPY ebbed and flowed inversely with stocks and risk acceptance, finding support ahead of Wednesday's lows.
But demand for higher yielding and riskier trades is proving difficult to extinguish due to near- or sub-zero risk-free yields.
That is limiting demand for the dollar -- which has overtaking the yen as top haven currency -- enough to keep USD/JPY below major resistance just beneath 106.
AUD/JPY's recovery toward key 21- and 55-DMA resistance at 76.12/16 looks like a good demarcation point for who will win the risk-on or off battle -- and how well the haven dollar and yen will perform against the other major and high-beta currencies.
Traders will scrutinize the U.S. employment report on Friday to gauge the recovery's progress without new pandemic fiscal support.
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