Dollar Drops as Euro Bearish Bets Erase Trump-Fueled Rally

• Dollar Drops as Euro Bearish Bets Erase Trump-Fueled Rally

The dollar traded lower versus most of its Group-of-10 peers on position unwinding after the latest U.S. employment report, while the euro attempted to maintain bullish momentum fueled by a more hawkish-than-expected European Central Bank.

The Bloomberg Dollar Spot Index pared some its losses as traders across Europe noted some intra-day accounts fading the latest dip. The early drop picked up its tone from last week’s close as investors assessed that market pricing reflected three hikes by the Federal Reserve this year and left dollar-bulls looking for signs from this week’s meeting that four hikes may be a serious option for policy makers.

The euro’s outlook remains constructive even as it failed to sustain gains seen early in the day. The change in the ECB’s tone, together with its consideration to increase interest rates before the completion of its bond-buying program, have wrong footed the market. Investors have been closing euro shorts versus the dollar, the Swiss franc and the yen, sending the common currency higher. Yet the move’s steepness, with the Euro Bloomberg Index rising by the most in three months, has seen some range-seeking sellers, traders in Europe noted.

Spot action aside, euro sentiment has become less bearish in the options market as well. Risk reversals on the one-year tenor, which largely overlooks noise from political risks across the currency bloc, show that bearish bets have reversed their course since the U.S. elections in November. They still remain in favor of dollar calls as interest rate differentials matter. On the front-end, bets are close to turning euro-bullish for the first time in four months.

• For now, EUR/USD may remain within 1.0645-1.0700 range as a total of EU4.8b worth of expiries roll over Monday
  • The pair has shifted to a buy-the-dips approach with large demand seen at 1.0620-40 and circa 1.0600: traders
  • Leveraged demand for euro is also seen in the crosses, with order books skewed toward further buying
  • EUR/USD hit a fresh one-month high at 1.0714, and dropped near 1.0668, its open level for the day, after short-term names sold into the rally
• EUR/CHF managed to rise above 1.0800 handle for the first time in three months as investors closed shorts, in spot and options markets alike
  • Shift in ECB tone has eased concerns over a possible move toward the lower band of the SNB’s unofficial 1.05-1.10 corridor that prompted the franc-long positions in the first place
  • This could mean a lower need for interventions by the central bank that convenes Thursday; no rate change is expected while no press conference is scheduled
• The pound traded higher versus most of its G-10 peers; cable managed to gain as much as 0.6% on the back of model accounts supporting it, after the pair managed to hold support from its post-October flash crash trendline
  • Interbank names look to fade any further pound strength amid May’s attempt to silence her fellow party rebellion as she tries to win the power to trigger Article 50. With the market split over the effect of the actual Brexit trigger on the pound, risk reward is seen by some investors in offering rallies in pound crosses: traders
• Aussie outperforms, gains versus all G-10 peers; it tests the 38.2% Fibonacci retracement of its drop since Feb. 23; leveraged demand in AUD/NZD also boosts the currency
• Yen higher a second day; support from the dollar comes from nearby 55-DMA at 114.27
• Expiries Monday in kiwi at 0.6950 (NZ$353m) and 0.7000 (NZ$371m) may anchor price action: DTCC
• Some information comes from FX traders familiar with the transactions who asked not to be identified because they are not authorized to speak publicly