Traders trying to find every reason to sell the USD

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Traders this week has certainly tried to find every reason to sell the dollar as discussion on Fed tapering continue to weigh on the greenback.

In consequence, the rationale behind the recent euro strength as it hit 1.3833 during late Asian trade, its highest since October 2011, has more to do with markets continuing to favour the euro as their favourite anti-dollar trade as opposed to a strong showing of fundamental data out of the euro-zone as evidenced by the release of German Ifo data.

October was the first time in six months where German business morale fell to 107.4 from the previous month’s reading of 107.4. Though the euro’s reaction was fairly muted, we saw Spanish and Italian yields rise after hitting a five month low on Thursday.

The euro backdrop continues to be fragile as Thursday’s data showing euro zone manufacturing and services activity showed that the recovery in the euro zone remains sluggish. Speculation has begun as to when the ECB will begin to “talk” down the euro as the strength of the euro is an additional concern for the currency bloc, which needs to boost exports to foster the growth sorely needed to help bring debt levels down to a more sustainable levels. The last time that the ECB criticized the euro was in February after EUR/USD hit a high of 1.3700 when ECB President Draghi warned that should euro “appreciation is sustained, it may alter the ECB’s view on price stability.” The euro, at that time, then declined to below the 1.3600 handle which suggests that they are comfortable at current 1.3700 – 1.3800 levels and the central bank’s pain threshold is closer to 1.4000.

Technically, for the pair of EUR/USD, support is found at 1.3770 and then 1.3710. On the flip side, resistance is located at 1.3832, followed by 1.3862 and 1.3897.

In the UK, the pound was not able to hold onto its gains of 1.6240 after the release of GDP data which showed the economy expanded by 0.8% in the third quarter and has since retraced to 1.6100 levels. UK construction continues to demonstrate signs of recovery, rising 2.5%, gaining support from the government’s Help to Buy scheme where the government is underwriting mortgages. The pair of GBP/USD has traded within a range of 1.6115 and 1.6255 this week, looking to break above 1.6246 to set its sights at the psychological level of 1.6300. On the downside, support is seen at 1.6115, and 1.6100.

Across the Atlantic, North American futures were flat as Durable goods though gained 3.7% in September, the core figure, stripping out transportation declined 0.1%. Later this morning, we will have the final University of Michigan/Thomson Reuters consumer sentiment index where analysts are calling for a drop to 74.8 from the initial reading of 75.2 and wholesale inventory numbers for August on tap.

The Canadian dollar is heading to a seven week low against the greenback, largely attributed to the Bank of Canada’s dovish tone earlier in the week, removing its language for the need of future rate hikes. Canada’s largest export, crude oil, has lent little support to the loonie as oil prices touched its lowest levels since June on Thursday. There is no domestic data on tap for Canada today and USD/CAD is likely to move in tandem with broader market themes. Traders continue to eye the 1.0453 level as a sustained break above this could bring forth 1.0528. For buyers of USD, a return to 1.03 levels will only emerge with a close below 1.0408.

By Cheryl Girling of Cambridge Mercantile Group

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