Dollar pares losses after Summers withdraws

The surprise withdrawal of Larry Summers from the US Federal Reserve chairman race has been greeted with positivity.

Speculation that Janet Yellen is now the front runner for the position has given markets a reason to believe that Fed tapering will be pursued with less immediacy. As a result the dollar has slid against the euro, and we are now witnessing the pair push through the 200-week moving average to test the $1.3380 zone for the first time since 28 August.

Speaking at the SME conference in Berlin, Mario Draghi stated that European Central Bank base rates would remain the same or lower for a sustained period of time. Because eurozone inflation came in as expected, rising 1.3% year-on-year, the market may well believe that Mr Draghi has the room to initiate negative rates. However, the advantages of any additional rate cuts are somewhat negligible and therefore unlikely.

The long-awaited Fed press conference takes place this week, and questions remain as to whether a degree of tapering to the tune of around $10 billion from the current $85 billion per month is already priced into the market.

A break through the highs of $1.3383 would put a strong bias to a move upwards towards of the $1.3410 level. Any break and close above this would see a push towards $1.3450. On the flipside, should the pair continue to retrace back through $1.3350, we cannot rule out a pull-back towards the pivotal $1.33 metric.

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