We are likely to cruise into the end of the week and month end, with the major data releases and events of the month behind us. That said, there are three underlying themes to FX markets that continue to drive the price action. The first is the growing yield differential in favour of the dollar. It may be some time before the Fed is even going to contemplate raising rates, but the impact is being seen in other areas, most notably via bond yields. Yesterday, the spread between 5Y US bonds and Germany moved further lower, meaning US 5 yields are now 1.45% above Germany. Secondly (and related), there are the shifts we are seeing in Europe from both fiscal and monetary policy makers. ECB President Draghi was more pointed on deflation risks last week, whilst we have seen a more vocal push against the austerity policies of the past, most recently from France. Finally, events in the Ukraine continue in the background, impacting both on European and on the wider geo-political scene.
For today, we are seeing a slightly weaker tone to the dollar at the start of the European session. Sterling is still more favoured for a technical bounce from here, given the relentless losses on cable over the past few weeks. The euro could struggle for the same, given growing expectations for fresh action from the ECB next week. Overnight price action has favoured the kiwi, bouncing from a near six month low from the dollar and pulling back from the 1.12 level on AUDNZD. Other interesting price action can be seen on CAD (close to 1.10 key resistance area on USDCAD) and USDJPY, struggling for a sustained push above the 104.00 level.