Dollar holds weaker below mid-94.00s

3 July, 2018

Fading German political uncertainty lifts EUR and prompts some weakness. Flattening of the US yield curve further collaborates to the weaker tone. 

The greenback, as measured by the US Dollar Index eased on Tuesday and held with marginal losses below mid-94.00s during the early European session. 

An 11th hour deal on migration issues helped ease the latest German coalition crisis and triggered a modest short-covering bounce around the shared currency. This coupled with positive incoming UK economic data, with the latest surprise coming from the UK construction PMI, boosted the British Pound and was eventually seen weighing on the buck. 

Meanwhile, flattening of the US yield curve, amid growing concerns that a global trade war would slow economic growth and inflation worldwide, further collaborated towards keeping the USD bulls on the back foot. The Fed and the bond markets are at odds over the outlook for the US economy and inflation as, despite two rate hikes this year, long-term rates have struggled to keep pace and caused the yield curve to flatten.

Hence, it would be prudent to wait for a strong follow-through buying before confirming that index is poised to continue with its bullish trajectory and build on strong gains of 5% recorded in the previous quarter.

There isn't any major market-moving economic data due for release on Tuesday and hence, the index seems more likely to be driven by external factors ahead of this week's other heavyweight macro releases, including the keenly watched non-farm payrolls on Friday.

Technical levels to watch

Immediate resistance is pegged near 94.67 level, above which the index is likely to aim towards challenging YTD highs resistance near the 95.00-95.10 region set last Thursday. On the flip side, retracement back below the 94.30-20 area could get extended towards the 94.00 handle en-route last Thursday's swing low near the 93.85 level.

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