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The potential for dollar reversal

We’ve seen some creeping dollar strength overnight, the main exception being the Aussie which has held above the 0.9250 level for the most part, aided by stronger domestic data showing better than expected business confidence and also house price increases in the second quarter. Whilst we have seen some correction in equities more recently, the dollar has been less inclined to give up some of the recent gains. The dollar index itself has risen in only 4 of the past 20 sessions, Sterling especially looks stretched vs. the dollar, daily RSI indicators at levels that were last seen on a more sustained basis in the early part of 2013. For sterling at least, there may be a partial resolution with the release of the Bank of England Inflation Report tomorrow. Over the past two years, the daily cable range on Inflation Report days has been nearly twice the normal daily average and with the market clearly short sterling, the risk is skewed towards short-covering on anything other than a decidedly dovish outcome.
The other stand-out from overnight activity has been the kiwi, which has weakened towards the 0.8400 level with housing data falling to the soft side and further cementing the view that the RBNZ will be on hold for the remainder of the year after the recent tightening cycle. Looking at the data calendar, there is nothing that is going to shift sentiment dramatically today. The German ZEW reading will be of passing interest at 10:00 GMT. Otherwise, there are no key US releases until retail sales data tomorrow.

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