EUR/USD rose to retest August’s pandemic recovery peak as falling Treasury yields following the Fed's dovish policy shift weighed on the dollar, helping unstoppable sterling bubble up to a fresh 2020 high nL1N2FX17Y.
The dollar's only solace came against the yen, which weakened on hopes that stimulative Abenomics policies would survive the tenure of their architect nL1N2FX1E1, Prime Minister Shinzo Abe, who is stepping down.
The dollar started falling before Vice Chair Richard Clarida reinforced the accommodation implicit in the Fed’s new framework, including the use of balance sheet expansion nL1N2FX0QK.
Some of the yield-curve flattening may have been tied to month-end pruning of steepening trades, but it also reflects doubts about the Fed’s ability to raise inflation much and their need to keep funding costs low through balance sheet expansion and near-zero policy rates.
ECB board member Isabel Schnabel saw no need for easing policy further because the ECB’s economic and market expectations are being met.
Schnabel was also not yet put off by the euro's strength nL8N2FX1YC.
Though the Fed tends not to make much of dollar moves unless they seem excessive, the currency’s current retreat does favor higher inflation, though not the domestic demand-driven type they would prefer.
Beyond the 1.1966 August highs, EUR/USD has a 161.8% Fibo objective off the March base at 1.1976, but 1.20 remains the crucial options and long profit-taking obstacle, especially with record IMM speculative net longs.
The yen was the one major currency weaker than the dollar, as risk-off reflexive gains scored on Friday on Abe’s resignation reversed nL1N2FX0P0.
But the reduced concern about Japanese monetary policy becoming less accommodative and yen-negative was met by broader Fed-related dollar weakness nL1N2FX10B.
USD/JPY’s rebound ran into offers by the 50% Fibo of Friday’s tumble and the 200-hour moving average by the 106.09 high on EBS.
Sterling slipped overnight, but rode EUR/USD’s coattails to new trend highs of 1.3396, getting closer to 2019’s 1.3516 peak nL1N2FX0RW.
USD/CNY fell close to 2020’s 6.8399 low by the 38.2% Fibo of the 2018-19 uptrend at 6.824.
Robust China services PMI and slowly expanding manufacturing nL4N2FX0O1 and Fed accommodation could trigger a drop toward 2019’s 6.66685 low.
Soggy stocks and oil's drop weighed on emerging markets currencies, while AUD and CAD gained, with AUD/USD at its highest in two years ahead of Tuesday's RBA meeting.
The focus this week will be ISM manufacturing Tuesday, ADP and beige book Wednesday, claims and non-manufacturing ISM Thursday, and Friday’s monthly employment report.
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