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Dollar Bulls Spooked by Politics Look for Support From Yellen

The dollar remained on the defensive before Federal Reserve Chair Janet Yellen’s testimony to Congress as a political turmoil in the U.S. continued to deter bulls.

The release of emails by President Donald Trump’s son that said Russia backed his father’s presidential campaign curbed demand for fresh dollar longs, according to traders in Europe. The U.S. currency was also weighed down by dovish comments from Federal Reserve’s Lael Brainard. Investors now look for Yellen to offer some guidance on the timing of a potential shrinking of the Fed’s balance sheet and also on the outlook for inflation and interest rates.

The greenback traded mixed versus its Group-of-10 peers and pared losses as measured by the Bloomberg Dollar Spot Index after some profit-taking in euro longs and as the pound dropped toward $1.28. The U.S. currency orbited the 1.29 level versus the loonie before the Bank of Canada’s much awaited policy decision. Employment data and hawkish commentary by BOC officials have helped cement expectations for a 25-basis-point rate increase, as shown by overnight indexed swaps.

As the Canadian dollar staged an impressive rally of almost 7 percent over the past two months, positioning has become crowded, said the traders, who asked not to be identified as they weren’t authorized to speak publicly. As a result, demand for upside protection in dollar-loonie has surged, with one-week risk reversals rising to the highest level in eight months. The gauge was up for an eighth day Wednesday, the longest advance in four years. 

Unless Yellen delivers a game-changing speech, a dovish rate increase could see the pair climbing above 1.3000 while a hawkish one could eventually see a test of the 78.6 percent Fibonacci retracement of the rise since May 2016 at 1.2746.

  • The euro traded 0.1% lower at 1.1452 as of 10:33 a.m. London after investors took profit near the day’s high at 1.1489: traders
    • Short-term accounts faded the euro’s strength yet trimmed their shorts as the pair dropped near 1.1440 support
    • Large demand for fresh euro longs from leveraged and real money names is seen above 1.1300 handle; large expiry Friday at 1.1500: DTCC
    • DeMark TD Sequential provided the first sings that the bullish trend may stall as a Sell Setup Series is completed
  • The yen led gains versus the greenback, gaining 0.5% to 113.32 per dollar; the sterling led losses until the release of U.K. labor data that helped it move to positive territory
    • Cable fell to 1.2812 low after Bank of England Deputy Governor Ben Broadbent said he isn’t ready to support an increase in interest rates
    • The pair rose above its 1.2848 open level after better than expected weekly earnings excluding bonus; 55-DMA resistance at 1.2876 back in focus

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