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Dec 06 - 04:55 PM

EUR/USD - COMMENT-US Recap: Risk Aversion Repels EUR/USD But Dollar Bounce May Fade

By Randolph Donney  —  Dec 06 - 01:40 PM

The dollar index rose on Tuesday in risk-averse U.S. trading as investors remained rattled by the previous session's unexpectedly strong services ISM and its implications for Fed rate hikes, though gains in the U.S. currency might not last.

Traders are caught in a central bank vigil ahead of Fed, ECB and BOE meetings next week while also attempting to square up year-end positioning.

The index's 105.50 Monday highs held below Friday's peak, the 200-day moving average and daily tenkan at 105.59/63/645.
Near-term gains should be seen as a correction within the downtrend from September's 20-year peak that reversed the 29% pandemic recovery the Fed led with its rate hikes nL1N32W15K.

But further rate hikes Fed Chair Jerome Powell and others have signaled will be smaller following four straight 75bp rises caused the recession-warning 2-10-year Treasury yield curve to invert to new multi-decade lows at -81.7bp Tuesday.

Two-year bund-Treasury yields spreads retreated this week from Friday's least negative levels since June, while ECB chief economist Philip Lane said he thought the inflation peak was close.

But there is concern that the ECB's own forecasts indicate inflation remaining far above the 2% target for years nL8N32S34EnL1N32W0AB, as core inflation unexpectedly increased in November nL1N32Q0PX.

EUR/USD fell 0.1% as risk-off flows intensified in U.S. trading, favoring the haven dollar.

Risk-sensitive sterling weakened modestly after Tuesday's early high at 1.2266 again ran into sellers near August's high and the 50% Fibo of the 2021-22 downtrend.

USD/JPY was about flat after its rebound following the ISM non-manufacturing beat was capped by November's 137.50 low on EBS and the 61.8% Fibo of last week's slide.

As with EUR/USD, sterling and other pairs, this week's dollar rebound is a correction of last week's oversold slide and glossing over of decent payrolls data.

Next week's U.S. CPI, Fed, ECB and BoE are next event risk, with all three priced to hike 50bp.

For more click on FXBUZ

Refinitiv IFR Research/Market Commentary


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