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EURUSD leads rebound as dollar drops

Written By Swissquote Bank Research Team | 2018-08-07 07:38:00 GMT

Soft German data offset by investor optimism

A 4.0% drop in German factory orders for the month of June compared to a much smaller 0.4% decline expected made the headlines. The slump in orders was driven by a drop from non-Eurozone countries and comes on the back of a rise of 2.6% in May. Unsurprisingly, we found out this morning that German industrial production also fell 0.9% in June versus a smaller 0.5% drop expected. Meanwhile the more up-to-date German construction data was not great either as the sector’s PMI barely grew, printing 50.0 in July vs. 53.0 expected. However it was not all doom and gloom from the Eurozone. The closely-watch Sentix Investor Confidence index, which is based on a survey of about 2,800 investors and analysts asking them to rate the relative 6-month economic outlook for the Eurozone, rose 2.6 points in July to 14.7 compared to 12.8 expected. A reading above 0.0 indicates optimism, below indicates pessimism. The fact that it was above zero and higher than the prior reading suggests investors and analysts grew in confidence in July despite all the uncertainty about the trade tariffs and Brexit.

Dollar weaker across the board today

Today’s weakness in the dollar was plain to see: even the GBP/USD was managing to rebound, not to mention the noninterest-bearing gold and silver. The pound was long overdue a rebound anyway after the Bank of England’s tightening of monetary policy last week. Although – as it turned out – the decision was a so-called dovish rate hike, it was a hike nonetheless. Not only that, but it was as hawkish as the BoE could have been given the UK’s current circumstances. So, the dovish hike should have been expected. Also coming back against the dollar was the Aussie after the Reserve Bank of Australia was slightly more hawkish (or less dovish) overnight than expected. But the Japanese yen is where the dollar is showing the most weakness against. The yen has staged a decent rebound ever since the Bank of Japan’s subtle policy tightening last week, when it said it would allow the 10-year JGB yield to deviate up to 20 basis points from zero before intervening.

Dollar may struggle without fresh catalyst

So, the dollar was weaker against a basket of foreign currencies today, and this was further fuelling the recovery of the EUR/USD exchange rate. We are not surprised whatsoever with the dollar’s hesitation at these levels. As we have been banging on about it, the greenback needed a pullback after it climbed to key levels against her rivals but without any fresh stimulus. A hawkish Fed may already be priced in and we felt that Friday’s mixed-bag jobs report was never going to be enough to lift the Dollar Index out of its existing range. So far, it has proved that way with the DXY holding below that 95.50 resistance level.

EUR/USD at long-term support

So, we have early signs of a potential short-term top being formed in the dollar and this could be good news for the EUR/USD and other dollar pairs. The EUR/USD dipped below last month’s inside bar candle at the start of this week before rebounding. If rates go on to break some resistance levels now, such as 1.1620 and 1.1650 then the failed breakdown attempt below 1.1550 could be a sign that the bears have gotten into trouble. This is an important point to take into account given the significance of the long-term 1.1550-1.1600 area, where the EUR/USD had moved sharply from before. An ideal development for the bulls would be if rates go on to break above the most recent high at 1.1745 now, for this will confirm the breakdown attempt as being a failure and thus a bullish reversal. However, if the EUR/USD goes back below the 1.1550 level later on in the week then this may pave the way for a far more significant drop in the weeks ahead. So, it is not out of the woods just yet, despite today’s rebound.

EURUSD

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By Swissquote Bank Research Team
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