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USD Index Extends Decline, Eroding Post-FOMC Gains

  • Greenback weakness extended on Wednesday as the US Dollar Index registered a third straight session of declines, eroding the entirety of last week’s post-FOMC advance. While not prompting any extension of the moves, US ADP underwhelmed, missing expectations by nearly half-a-million jobs.
  • Despite the overall dollar retreat, a brief bout of equity weakness from the highs kept price action in G10 FX muted throughout the US trading session. On the day, GBP, SEK and NOK led gains, whereas NZD (Unch) was the clear relative underperformer.
  • EURUSD was underpinned by notably stronger CPI flash estimates and returns to December’s familiar territory around the 1.1300 mark ahead of tomorrow’s ECB decision.
  • With the European central bank’s baseline assumption facing increased pressure the ECB could opt to retain some optionality, at Thursday’s meeting, by stressing that inflation forecasts carry a high degree of uncertainty and that there are upside risks to inflation (perhaps citing the risk of persistent energy price pressures).
  • Bank of England also in focus tomorrow, where analysts appear unanimous in expecting a 25bp hike. GBPUSD has further recovered off its recent low of 1.3358 on Jan 27 and has topped resistance at 1.3525, Jan 26 high. A continuation higher would suggest scope for a climb towards 1.3662 next, the Jan 20 high.
  • Looking at EURGBP, the broader trend remains down, and a resumption of weakness would open 0.8282/77, the Feb'20 and Dec'19 lows and the multi-year range base at 0.8300.
  • After the major European central bank decisions, markets will await US ISM Services PMI data, before Friday’s US Non-Farm payroll takes centre stage.

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