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The US dollar erases early losses after negative catalysts in global geopolitics

By OFX

The US dollar index has been falling this week, but is having a consolidation this morning and erasing all of the early losses it had in the European and Asian trading session.

There are two main catalysts that are making the US dollar erase its initial losses and pushing it towards a “risk off” environment. (1) Trump’s talks with North Korea. These ended with his abrupt exit after the two sides couldn’t agree on a deal to relieve Pyongyang of US sanctions in exchange for giving up much of its nuclear-weapons program. (2) The conflict between India and Pakistan, which might have broader implications following the Pakistani capture of an Indian Air Force pilot.

In other news, Jerome Powell’s dovish attitude continues. He told lawmakers on Wednesday that he’ll soon announce a plan to stop shrinking the $4 trillion balance sheet.

The Loonie is weakening this morning in North America, following more negative market sentiment. Primary drivers include a slightly weaker crude oil WTI, and the US dollar’s rapid recovery of early losses seen in the European and Asian session.

After the released CPI, that came at the consensus of 1.4 percent yesterday, the next key date will be March 6th. On this day, the Bank of Canada is widely expected to leave its policy rate unchanged with investor focus on whether the statement hints at staying on hold for longer than markets are anticipating. Governor Poloz has made clear the path forward is still towards higher interest rates; however, more data is needed. According to Poloz, the road back to neutral interest rates is "highly uncertain."

These days, the Loonie is trading much more like an exclusive cyclical commodity currency. This is understandable given the correlation with crude oil. Canada’s trade balance, capital flows, overall economic cycle, and, by extension, monetary policy are all of course strongly influenced by the path of energy prices, which in turn reflects fundamentals.

From a technical perspective, the USD/CAD pair had a consolidation between 1.3125 and 1.3175 during the week. This morning it is testing the 1.3200 handle and it might push higher if the “risk-off” environment in North America increases. The USD/CAD pair continued in its uptrend and, given that the Loonie is trading with more exogenous drivers lately, the USD/CAD might test 1.3235 and then 1.3275 over the next few days.

The EUR/USD continues rising, and it has tested and traded above the 1.1400 handle this morning. At the time of this writing however, it is trading at 1.1396. From a technical perspective, there’s an area of strong resistance between 1.1400 and 1.1420, so any break could make for a move towards 1.1444.

One of the drivers this morning is the German consumer price index (CPI) year to year for February, which came in at 1.60 percent versus the expected at 1.50 percent. This is helping to push the shared currency 0.23 percent higher vs. the US dollar at the time of this writing.

The British Pound has held firm over the last 24 hours, although it opens slightly below the 1,3300 handle vs. the US dollar in North America this morning. From a technical perspective, there’s an area of resistance between 1.3300 and 1.3360, so any break could make for a move towards the 1.3550 – 1.3600 handle.

Meanwhile, the Government’s Brexit motion was approved yesterday, with the Letwin-Cooper Amendments ensuring that May must offer a vote on no-deal should her plan not be passed.

Risk sentiment shifted again overnight with equity markets softening modestly, and the Greenback and US bonds moving higher. Within this context, the Aussie has drifted lower and opens in North America at 0.7130.

The New Zealand dollar fell through trade on Wednesday, having failed to break through resistance at the 0.6900 handle. In fact, the NZD was one of the day’s worst performers. It is currently losing more than 70 pips against the US dollar and touching intraday lows at 0.6824. With little of note driving direction, the Kiwi appears to have fallen victim to a correction in equity markets amid uncertainty surrounding US-China trade talks.