Quiet trading conditions persist ahead of tomorrow’s key event risk – the BoC policy meeting and Fed Chair Yellen’s congressional testimony. The USD is trading mostly firmer against its G-10 peers but the movement is relatively limited.
US yields appear to be on the rise again, having remained reasonably steady over the last quarter. Funding markets typically tighten in such an environment.
Stay long DXY; neutralize EUR component through long EURUSD will prepare markets for a balance sheet normalization in September. In the event, the Fed has been noncommittal in contrast with the ECB and the latest soft earnings print in the US should continue to keep them on the sidelines.
The main risk in this trade given the weighting of DXY is that more activism from the ECB keeps EURUSD drifting higher. We thus neutralize the implicit short EUR exposure in this trade by long EURUSD outright leaving us net neutral on the pair.
Remaining (but smaller) exposure is long USD vs short in JPY and CAD (especially pre-BoC).
The EURUSD continues to test range resistance at 1.1400/50, with short-term pullbacks limited to supports at 1.1380 and 1.1300. We are relatively low conviction until we see the range highs decisively hold or break. A move back below 1.1300 would suggest they have held and opens 1.1215 pivot support. A break above would see next obvious targets at 1.16 (May-16) and 1.17 (Aug-15) spike highs.
Key events to watch in regard to EURUSD in the US will be Yellen’s Congressional testimony and CPI, both next week, as well as the July 20th ECB meeting.
Bought DXY at 97.1080. Stop at 95.00. Marked at -1.06%.
Buy EURUSD at 1.1388. Stop at 1.1070.
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