US dollar pares overnight gains

The world was looking grim when New York traders turned on their screens. The US threat of another $200 billion in tariffs against China had spooked traders during the overnight session. President Trump’s blustering at the NATO conference didn’t help to reassure markets, either. 

However, Bank of France Governor and European Central Bank executive committee member Francois Villeroy managed to lift the shroud of gloom. All he said was that the ECB could raise rates “at the earliest through the summer of 2019.” Suddenly, EURUSD sellers became US dollar buyers, obviously preferring a long-term fantasy of Eurozone policy tightening over the short-term prospect of a full-blown trade war.

EURUSD rallied from 1.1698 to 1.1755, and the commodity currency bloc caught a minor bid. The rally got a bit of an assist from a 0.3% rise in US PPI. The intraday EURUSD uptrend is intact while prices are above 1.1705 with a break of resistance at 1.1790 extending gains to 1.1860.

USDJPY rallied despite the trade tensions but could break above resistance in the 111.40-111.60 area. A topside break would target 113.60 while a drop below 110.80 would lead to a retest of 110.20.

Wall Street was not impressed by ECB rate speculation preferring to focus on the more immediate risks posed by the US tariff plan. The Dow Jones Industrial Average is down 161.18 points while the S&P 500 sank 0.54% as of 13:50 GMT.

The Bank of Canada did not surprise anyone when it raised the overnight rate to 1.75% from 1.25%. The surprise was in the tone of the statement. It was hawkish. The bank expects the global economy to grow by about 3.75% in 2018 and said the Canadian economy was operating close to capacity, assuming 2.8% growth in Q2. The Monetary Policy Report press conference starts at 15:15 GMT . USDCAD, which had climbed to 1.3171 overnight and was sitting at 1.3135, when the statement was released, dropped to 1.30081. Support is at 1.3050 and 1.3005.