The US dollar is trying to shake off from the harsh night session, slipping to a five-month low against the yen after the sharp decline in US government bond yields and rising bets that the US Federal Reserve (Fed) could cut key interest rates.
The yields of 10-year government bonds fell to its lowest level since September 2017, reaching the psychological threshold of 2% after the president of the Federal Reserve of St Louis James Bullard said he “may have to soon” cut interest rates given the growing risk of economic growth stemming from global trade tensions as well as weak US inflation.
The bond yields declined sharply as investors buy government bonds as a shelter for their capital in a context of escalating tensions in trade between Washington and its major trading partners.
The US Dollar Index, which measures the strength of the greenback against a basket of the six major currencies, was stable at 97.182 points after dropping 0.6% in the previous session. The US dollar is down even against currencies such as the Euro, as market participants have found bets for a weak Euro under conditions of sharply declining yields on US government bonds. At a certain moment, the US dollar became a safe-haven, but its strength rapidly diminished in the unexpectedly rapid decline in US bond yields, which can not be ignored.
The US Dollar Index breached the 55-day SMA on Monday and accelerated the downside to print new 3-week lows. If the selling bias picks up pace, the next stop aligns at monthly lows at 97.03 (May 13) ahead of the 100-day SMA at 96.94.
In the meantime, the constructive stance on the index is expected to remain unchanged above the key 200-day SMA at 96.45 and the 8-month support line at 96.46.
The Euro appreciated by 0.1% to 1.1250 USD, after gaining about 0.7% at night to 1.1262 USD, the highest level for the single European currency since May 13.
The Eurozone’s currency gained support from the weaker dollar, but analysts remain cautious about the long-term outlook for green money.
Given the close ties of the Eurozone with the Chinese economy, the Euro is one of the currencies most affected by the Chinese economic downturn, and this is a risk associated with the escalating trade war between the US and China.
On the release front, Eurozone consumer inflation indicators disappointed. The estimate for annual inflation in May slowed to 1.2%, down from 1.7% in April. The core indicator also fell, dropping to 0.8%, after a reading of 1.2% in April. Both indicators missed their forecasts.
At the moment, the pair is trading at 1.1250 and a breakout of 1.1277 (high June 4) would target 1.1283 (38.2% Fibo of the 2019 drop) en route to 1.1323 (high April 13).
On the other hand, the next down barrier lines up at 1.1220 (55-day SMA) followed by 1.1186 (21-day SMA) and finally 1.1116 (low May 30).
The British pound stabilized to 1.2667 USD after suffering a five-month collapse to 1.2560 USD on Friday. The British currency was pressed to a five-month low due to the vague prospect of Britain to choose Eurosceptic Prime Minister Theresa May’s resignation to take a firm stance on Brexit.
The GBP/USD pair quickly reversed an early European session dip and spiked to the 1.2700 neighbourhood, or fresh one-week tops in the last hour.
Having touched a daily low level of 1.2642 following the disappointing release of UK construction PMI, the pair witnessed an intraday turnaround and moved back into the positive territory for the third consecutive session.