The US dollar rallied strongly against the euro and other forex trading counterparts, as surprisingly dovish commentary from a prominent European Central Bank official sparked aggressive short covering through New York currency trading. ECB Governing Council member Yves Mersch said that the central bank should exercise caution in the face of sharp risks to economic growth and signs that inflation will moderate through the medium term. The previously hawkish Mersch forced a clear correction in euro interest rate expectations, and the single currency fell sharply in response to the surprising rhetoric. The US dollar seemingly benefited from a panicked short-covering on overextended forex positioning and rallied against other major currency counterparts.
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Forex traders largely ignored a mixed morning of US Consumer Price Index and Industrial Production figures—instead forcing major price movements on later developments in euro interest rate expectations. Indeed, the highly-anticipated CPI report showed that US inflation levels fell exactly at consensus forecasts through the month of December and did little to shift Federal Reserve Rate forecasts. Futures markets continue to price in a 50 percent chance of a whopping 75 basis points in Fed rate cuts through the month of January, and the dollar has suffered on expectations that domestic yields will continue to fall against major counterparts. That said, today’s rally was quite clearly a function of developments in other markets, and domestic Treasury Bond yields are actually marginally higher through the New York afternoon. A bounce in downtrodden government bond rates certainly bodes well for the greenback, but the dollar may nonetheless find it difficult to sustain current rallies on static Fed rate cut forecasts.
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Written by David Rodríguez, Currency Analyst for DailyFX.com,
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