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Forex: Dollar bulls back in the box

This will be seen as the week that the dollar bulls were put back into their box. The dollar index is now 1% below the average seen so far this year and remember that this was the year when most were looking for the dollar to appreciate on the back of Fed tapering and the risk of more monetary policy stimulus from others, principally the ECB.

Overnight, we have seen inflation data from China which came in line with expectations at 2.4%, with PPI coming in a shade weaker than expected at -2.3%. The data was partly taken as an excuse to take profit on Aussie longs, with a move back below the 0.94 level seen in Asia trade. To a lesser extent, we have also seen reversals on sterling and yen against the dollar. Given the price action we have seen so far this week, there remains the danger that we see further covering of dollar shorts into the weekend.

The data front today is not much of a distraction, with just US PPI at 12:30 GMT. Note that the ECB will announce details of further 3Y loan repayment later today. It is the repayment of loans back to the ECB that had shrunk its balance sheet and supported the single currency, a trend which has continued in 2014 and accounted for the relative strength of the single currency. This is combined with the limited potential of QE, as the ECB discusses the mechanics of undertaking such an approach in the face of deflation risks.

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