Dollar eases on solid US earnings

Long-covering pushes US dollar lower

The US dollar gave back some of its recent gains overnight, as delta-variant nerves eased on the back of strong US corporate earnings. That saw a reduction in haven flows, pushing US bond yields slightly higher and causing some US dollar outflows. The dollar index fell 0.20% to 92.77, where it remains in Asia in subdued regional trading.

In the bigger picture, the US dollar continues to hold onto most of its recent multi-week gains, and a dovish ECB later today could lift the dollar index once again. Having said that, with delta complacency rising as the week has gone on, the US dollar could just as easily drift lower into Friday with no real data to change the narrative this week. A break of 92.50 by the dollar index likely signals more US dollar weakness into the week’s end and early next week.

As outlined above, EUR/USD’s fate will be decided by the ECB this afternoon and should be good for 150 points either way from its present level at 1.1800. Sterling’s price action has also turned constructive, with GBP/USD rallying impressively 0.65% to 1.3715 overnight, recapturing its 200-day moving average (DMA) at 1.3703. Although the driver of the rally is elusive to me, I do respect the price action. The technical picture suggests now that a rally through 1.3730 could extend quickly to 1.3800.

AUD/USD and NZD/USD both recovered with risk appetite in general overnight, as did regional Asian currencies. However, both Australasians and regional Asia FX remain vulnerable to another swing south in risk sentiment in what has been a schizophrenic week. The IDR, MYR and THB remain heavy, and I consider them the most vulnerable to further Covid-induced sell-offs.

In Asia today, the only data point of note will be the Bank Indonesia policy decision. With inflation benign and growth downgraded by the central bank themselves, there is the potential for a rate cut, which would likely send USD/IDR sharply higher.

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