USD pressured by drop in yield

Risk sentiment starts the week in positive mode. Weekend reports that Germany will not stand in the way of allowing the (European Financial Stability Facility) EFSF and its successor the European Stability Mechanism (ESM) bailout funds to be combined to boost the ‘firewall’ against contagion in the Eurozone has helped to boost sentiment.

Market direction may be obscured by month end and quarter end window dressing this week and despite the likely positive start to the week there are still plenty of factors to dent risk appetite over coming days, not least of which is the gyrations in oil prices.

The USD has slipped over recent days in line with a pull back in US Treasury bond yields. Notably there has also been a pull back in speculative USD sentiment as recorded in the CFTC IMM data. The ‘risk on’ tone to market that appears to be developing today will likely result in renewed downside risks to the currency.

US economic data continues to outshine economic releases elsewhere although US housing data last week was notably mixed. It will be the turn of March consumer confidence and February durable goods orders to capture the market’s attention over coming days.

A slight decline in the former and a healthy increase in the latter are expected. However, it seems unlikely that either release will be particularly supportive for yields and in turn the USD, so it will require a further increase in risk aversion to push the USD higher over coming days.

EUR/USD appears to be settling into the middle of a 1.30-1.35 range. Direction has increasingly been led by economic factors rather than debt issues recently but the news on the former has not been particularly good.

The March German IFO today and EU Finance Ministers meeting will be the key events of the week while there will also be interest on Spain’s budget as well as Spanish and Italian debt auctions. The IFO will likely prove to be more positive for the EUR than the manufacturing surveys last week, with an uptrend in the data continuing.

Moreover, hopes that Finance Ministers will bolster the ‘firewall’ to prevent other peripheral countries from repeating Greece’s debacle, will also likely keep the EUR supported. Overall, this implies EUR/USD will likely continue to creep higher over the week, with a test of technical resistance around 1.3356 eyed.

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