The Euro positioning shift and yield factors

The Euro was again confined to narrow ranges during Friday with resistance close to 1.34 and it edged lower during the US session. Technical considerations had an important influence during the day as the Euro traded close to key resistance levels just above the 1.34 level, including the 200-week moving average. The currency was over-bought on a short-term perspective following strong gains and this combination made it even more difficult to attack resistance levels.

There was further speculation that the Federal Reserve would move to a September tapering of bond purchases and there was some reluctance to sell the dollar aggressively as the Euro dipped to test support below 1.3350 later in the US session. 

The latest betting odds have increased the probability of a September Fed tapering which provided some net dollar support and comments from Fed officials will be watched very closely during this week.

The latest CFTC positioning data recorded a net long speculative Euro position against the dollar for the first time since mid June which will substantially lessen the risk of a further covering of short positions.

The overall positioning was still long dollars which will hamper the US currency even though positions declined for the third successive week. 

The Euro edged lower on Monday while holding above 1.33.

The Euro positioning shift and yield factors, allied with underlying US fundamental trends, will provide dollar support. 

A solid base for the US currency against the Euro should be in place particularly given net global reserve flows which will strongly favour the US dollar. It will still be tough going for the US currency to regain much ground in the short term given that a September Fed tapering has effectively been priced in.

This will be another important week for Sterling with the latest inflation and unemployment data due for release. Following the Bank of England forward guidance released last week, the data will be very important. Any increase in the inflation rate would increase speculation that the MPC will need to raise rates earlier than they would like to while higher unemployment would have the reverse effect. Overall, Sterling will find it difficult to make much headway in the short term.