Dollar Rises From Near 10-Month Low as Euro Stalls Before ECB

(Bloomberg) -- The dollar recovered from close to a 10-month low and the euro succumbed to a round of profit-taking as traders braced for Thursday’s European Central Bank policy meeting, seen as the week’s key event risk.

Flows were modest as traders balanced ECB expectations against a weekly drop in Treasury yields that’s undermined the dollar. Failure of Republicans to advance a health-care overhaul has seen investors pare expectations for progress on other parts of the Trump agenda, such as tax reform, that may have given the economy a boost. Amid fiscal uncertainty, markets have trimmed rate-hike expectations for the Federal Reserve to less than 50% by year-end despite assertions from policy makers that another hike seemed appropriate.

• Dollar losses were paced by USD/JPY, which declined ~0.3% and reached its lowest since June 27, tracking 10-year U.S. yields; USD/JPY has trailed dollar losses elsewhere in recent sessions, and Wednesday’s decline may have been exacerbated by a 0.6 percent decline in EUR/JPY as traders pared euro longs ahead of Thursday’s meetings of the BOJ and ECB
• USD/JPY fell through technical support from converged moving averages ~111.80, falling as low as 111.56, with light stop-loss selling triggered under Tuesday’s 111.69 low, a trader in New York said
• EUR/USD fell to a fresh low for the day amid sluggish trading, dropping to 1.1510 after stalling overnight at 1.1557, below Tuesday’s 1.1583 peak that was highest since May 2016; the EUR was lower versus its G-10 peers; traders still expressed the view that EUR/USD is a buy on dips and bids are seen positioned below 1.1515 down to 1.1500, with stop-loss sell orders seen below 1.1490
• While the ECB is expected to keep policies on hold, a report that the bank has been examining options for asset purchases adds to speculation that Draghi will concede that the time is approaching to adjust QE programs to reflect that they’ve outlived their need; expectations are that the ECB may wait until the fall to announce any tapering plans, though he’ll also want to ensure that anything he says doesn’t feed through to excessive currency strength that would raise the challenge of reaching the bank’s inflation target
• “We expect the ECB to move one step closer to announcing a taper in the fall by removing its asymmetric bias on its QE at this week’s meeting,” wrote TD strategist Mazen Issa in a note to clients. Given that BOJ likely won’t surprise, Issa eyes a move toward 135 for EUR/JPY if ECB doesn’t disappoint
• Elsewhere, AUD/USD rose to 0.7959, highest since May 2015, as traders adjusted positions ahead of a local employment report; AUD continues to be underpinned by a perception that that the RBA may have shifted to a more hawkish footing after it said in meeting minutes that a neutral interest rate may be significantly above its current target

To contact the reporters on this story: Dennis Pettit in New York at dpettit5@bloomberg.net, Katherine Greifeld in New York at kgreifeld@bloomberg.net.

To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net, Vivien Lou Chen