Dollar dips despite inflation concerns

Currency markets remain steady after overnight dollar retreat

Currency markets ignored the inflation histrionics of the equity space overnight and continue to do so in Asia today, content to keep on selling US dollars. The move is ironic given that the higher inflation theme has been US dollar supportive in recent times. The dollar index fell 0.45% to 89.80, where it remains in muted Asian trading.

With the technical charts behaving as expected in currency markets, it makes more sense to concentrate on that picture, rather than the overnight noise. In this respect, the dollar index fell through support at 90.00 and traced a double bottom at 89.70 out overnight. 89.70 to 90.00 should contain it in Asia today, although the bias is to a lower greenback which could test support at 89.20 by the week’s end.

On that theme, EUR/USD and GBP/USD behaved precisely as expected, with both pairs rising overnight. EUR/USD rose 0.60% to 1.2220 and is expected to retest resistance at 1.2240, opening further gains to 1.2400. GBP/USD rose 0.40% to 1.4180, just ahead of resistance at 1.4240, after which further increases to 1.4400 are expected. Both currencies appear to be receiving post-Covid reopening premiums into their pricing. USD/JPY continued to grind lower to 108.90 but looks set to continue to be confined in a 108.50 to 109.50 range.

Risk appetite in the currency space lifted Asian currencies in overnight trading, and they are holding steady in Asia, helped by another neutral PBOC USD/CNY fix. As per yesterday’s note, most of the volatility is occurring in the DM space with EM content to play a side-line role, content to wait for more clarity from the deafening noise in equity markets.

The data calendar is light this week, with the only major release being the FOMC minutes this evening. Earlier in the day, British CPI for April showed a strong gain of 1.5%, up from 0.7% beforehand. This matched the forecast and points to increasing inflationary pressures as the UK economy continues to reopen.

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