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Prices Settle, But Underlying Sentiment Still Fragile

FOREX
  • Following the dollar's fierce Monday rally, the USD Index is fading slightly ahead of Tuesday's NY crossover, allowing EUR/USD, GBP/USD and others to recover off the lows. This puts EUR/USD closer to 1.05 headed into US hours, after trading as low as 1.0397 overnight.
  • A stabilisation of sentiment is also evident in equity markets, with futures uniformly higher, albeit still well short of the week's best levels - solidifying the scale of the risk sell-off on Monday. Despite the more stable outlook for spot prices today, markets remain fragile, with implied volatility across G10 FX still well elevated. Today, 1m USD/JPY implied vols cleared 14 points, the highest since the depths of the COVID-19 crisis.
  • CAD is the sole currency underperforming the greenback at this stage, putting USD/CAD north of 1.29 for the first time since mid-May, cementing the recent short-term reversal. The extension higher has resulted in a test of resistance at 1.2896, the May 19 high. Sights are on a Fibonacci retracement at 1.2945, where a break would open key resistance at 1.3077.
  • US PPI takes focus going forward, with markets continuing to look for any further clues on burgeoning inflationary pressure in the US. PPI is seen decelerating slightly on a Y/Y basis across both the core and non-core readings. ECB's Schnabel is also slated to speak, although a policy focus is unlikely today.
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