The dollar has been in the ascendency over the past four sessions and finds itself firmer again overnight. We’ve seen a slow creep of interest rate differentials in favour of the dollar, with the 2 year bond spread (US versus Germany) having moved 7bp in favour of the US (greater carry for long dollar positions) over the past week. This has pulled EURUSD back from the 1.1342 high seen last week, creating a neat double-top formation on the daily chart. In the bigger picture, this makes for tougher resistance in the 1.1342/76 area. It’s against sterling and the dollar bloc (principally AUD and CAD) where the greatest correction has taken place. Sterling’s weakness is inevitably linked to the ongoing flow of the Brexit debate, with the options markets becoming ever more bearish, reflecting a strong investor preference to hedge downside risk. Meanwhile, the dollar bloc has been softened by the modest downward reversal of commodity prices. The bottom line is that the US dollar recovery is more about the weakness seen elsewhere rather than a re-assessment of the reasons for a stronger dollar.
Today’s session is likely to be muted, given the long Easter weekend in many markets which will lead to muted trading both tomorrow and Monday. We see UK retail sales early on, with US durable goods and provisional services PMI data later in the session. One of the more hawkish Fed members (Bullard) is also due to speak later in the session, which could give some marginal support to the dollar should the same hawkish rhetoric be maintained.