Talking Forex: Euro Strengthens Against The Dollar

EUR/USD
Early support for the pair was provided by risk-off sentiment which stemmed from reports that some commercial banks in China have tightened lending for property. Despite these being unsourced comments, this struck fear across markets and saw a flow into safe haven currencies which weakened the USD as a flight to quality saw JPY strengthen overnight and push the EUR/USD higher. This alongside news that Moody’s upgraded Spain’s outlook after-market on Friday saw an increased appetite for EUR against USD with the upward momentum being exacerbated by a better than expected IFO release which saw the German IFO Business Climate reading print the highest level since July 2011. However, in spite of this the pair then pared this moved and dipped back into negative territory amid a regaining of territory for the greenback, with market talk of real money selling also adding to the downward momentum. Furthermore, anti-EUR sentiment continues to develop with expectations of a rate-cut in March building after ECB's Draghi signalled the central bank's March policy meeting could be critical in determining whether the ECB will provide more stimulus to the Eurozone economy.

GBP/USD
In a similar nature to that of the EUR/USD, the pair managed to benefit from the broad-based weakness in the USD and finish the session in positive territory. In terms of economic commentary from the UK, weekend reports revealed that BoE’s Carney said the MPC will not take risks with the UK recovery, and guidance now requires more complex judgement. Whilst Broadbent added to the dovish sentiment by reiterating the recent cautious theme from the BoE, stating he expects interest rate hikes to be "gradual and limited" when the BoE decides to tighten policy. However, given the generally initial weaker USD and option related flow, with a number of large strikes expiring on Tuesday at 1.6650 level, the pair managed to shrug off the dovish rhetoric from the BoE and an absence of support from recent M&A (Vodafone/Verizon Wireless) flow and finish the session relatively unchanged.

USD/JPY
Asia-Pacific trade showed a stronger JPY as safe-haven flows were observed following the aforementioned news out of China which weighed across Asian equities. This acted as a catalyst for broad-based USD weakness and thus dragged the pair lower. However, a recouping of USD losses brought the pair off the lows, with the upward momentum being exacerbated by a USD 400mln option expiry at 102.50. In terms of economic commentary out of Japan, one interesting series of comments came from Japanese PM adviser Hamada who said BoJ can wait for summer data releases, reflecting the tax hike effect to decide whether to ease further and PM Abe should put off the decision until H2 on a second sales tax hike if the Japanese job recovery stalls and deflationary gap persists. Therefore moving ahead, any commentary which could provide participants with any further clarity on this issue could be of upmost importance for the pair.