The safe-haven yen and Swiss franc out-performed other FX majors as investors pruned optimistic bets on post-pandemic recovery, while the dollar slumped on expectations that the Fed would signal its intention tomorrow to keep rates low for as long as necessary.
The well-deserved correction in risk assets came after markets largely returned to pre-coronavirus levels, or higher in some cases.
The dollar index’s 96.22 session and trend low perfectly completed an ABC measured objective off the March and April highs, sending daily RSIs to their most oversold since the March 9 pandemic low.
The reaction to Wednesday's FOMC and U.S. inflation data should be telling.
EUR/USD recouped early losses nL1N2DM1OF with help from EUR/JPY’s sharp rebound off its dive to the 10-DMA in early London trade and after shaking off Germany's horrendous April trade data nL8N2DM103.
Widening 10-year Bund-Treasury yield spreads ahead of the Fed and stocks' rebound from overnight lows aided EUR/USD’s recovery toward Friday’s 1.1384 trend high, not far from March’s 1.1495 peak.
The euro sell-off and rebound also came as EU finance ministers met to discuss the proposed 750 bln euro post-pandemic recovery plan nL8N2DM588 that continues to face opposition from some members nL8N2DM4TX.
A USD/CHF breakdown below key cloud base and 50% Fibo support at 0.9541 was a material factor in the dollar index’s sudden U.S. fall toward its downside ABC objective, while the SNB-supported EUR/CHF slide held above last Thursday’s low.
USD/JPY’s tumble from Friday’s 109.85 high by the 200-WMA -- struck after the non-farm payrolls surprise -- is already below last week’s 108.08 range breakout point and eyeing the June 2 breakout session’s 107.515 EBS low and Wednesday’s 107.28 cloud top.
The kijun at 107.92 is resistance, along with heavy option expiries at 108.
AUD/USD nL1N2DM1NL and AUD/JPY nL1N2DM17M have fallen back from failed breakouts above their December peaks, largely due to the incongruity between those risk-on highs and COVID-19 aftershocks, as well as tumbling May Chinese imports nL4N2DK0KQ and growing tensions between China and Australia, including a warning from the former to its students about choosing Australia nL4N2DM1HZ.
Dollar weakness allowed GBP/USD to grind out a modest new June high above the 200-DMA and 61.8% Fibo of its December-March slide at 1.2713 nL1N2DM1N1, while ignoring hard-Brexit risks.
Falling stocks and broader risk-on trade profit-taking hurt recent recoveries in MXN and BRL and left most commodity and emerging markets currencies on the back foot, as money flowed back into Treasuries, gold and other havens.