Dudley Comments Frustrate EUR/USD Rally Attempts, Dollar Secures Net Gains

After making limited gains ahead of the US open, EUR/USD was pegged back by relatively hawkish comments from Federal Reserve member Dudley and there is scope for the pair to drift lower in the short term under the weight of long Euro liquidation.

EUR/USD consolidated near 1.1200 late in US trading on Friday as the subdued US data stemmed dollar momentum.

The COT data recorded a further increase in long, speculative Euro positions to just below 80,000 contracts in the latest weekly data. This was the highest reading for six years and the second highest long Euro position in the last 10 years.

The data will maintain the risk of long liquidation if the Euro is unable to make further headway.

EU exit talks between the UK and other 27 EU member formally started on Monday, although there was still a high degree of uncertainty surrounding the UK negotiating stance. A broadly confrontation tone would tend to undermine confidence and, although the main impact would be on Sterling, there could also be a negative impact on the Euro. A relatively optimistic tone could provide limited net support to the single currency.

Ahead of the US open, there was further uncertainty surrounding Federal Reserve policies following comments late on Friday from two FOMC members.

Dallas Fed President Kaplan stated that the Fed must be patient in raising interest rates further and that he would need to see an improvement in inflation. Minneapolis President Kashkari also explained his dissent against last week’s Fed rate hike and his main position was that he wanted more evidence that that low inflation as transitory before increasing interest rates again.

The comments increased speculation that there were divisions within the FOMC which could put further rate increases in doubt and EUR/USD consolidated near 1.1200 as narrow ranges dominated.

At the US open on Monday, there were comments from New York Federal Reserve President Dudley that he expected wages growth to strengthen to the 3% area over the next year or two. Importantly, he also stated that halting the tightening cycle now could imperil the US economy while a flattening of the yield curve was due to international factors.

The comments triggered selling pressure on Treasuries with 10-year yields rising to 2.17% as markets looked for the tightening process to be sustained. The dollar index edged back to just above the 97.00 level.

The relatively hawkish comments and higher yields provided a renewed lift to the dollar as EUR/USD declined to the 1.1175 area, although overall ranges were still relatively tight.

EUR/USD 4-Hour Chart

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Tim is a contributing author to EconomicCalendar.com. He is an economist and has been involved in financial markets for over 20 years as an analyst. He specialises in global economic trends, macro policy and central banks. Extensive knowledge, experience and data mining is used to anticipate trends in equities, bonds and forex with a contrarian slant. He is a graduate of the University of York with a degree in Economics/Econometrics.