The combination of stronger US economic data and signals from the Federal Reserve that it is looking to continue the normalization process helped the dollar extended its recovery. The dollar posted a significant technical reversal against many of the major currencies on May 3. The Dollar Index rose for its third week, as the greenback climbed against all the major currencies but sterling (+0.9%).

Sterling was aided by some polls indicating a shift toward the Remain camp. The referendum will be held a month from Monday. Also, April retail sales rose twice the median forecast, pointing to a good start to Q2 for consumption. Sterling’s advance retraced more than 61.8% of the losses since May 3. We are skeptical of referendum-inspired gains. It is not like the referendum had blocked sterling. It appreciated 6.8% from late-February through early-May. It is in the options market that the referendum risk can be managed more effectively than in the spot market.

The overall dollar direction is important for sterling, and the challenges for the UK transcend EU-relations. The market sold into the upticks, and sterling dropped 0.75% before the weekend and closed a little above $1.45. Initial support is seen near $1.4460, and then $1.4400, with the month’s low around $1.4335, which coincides with the lower Bollinger Band.

The euro traded below $1.12 for the first time since late-March but finished the week above it. The lower Bollinger Band near $1.1175 lent support ahead of $1.1145, the March lows, which is just below the 100-day moving average (~$1.1155). Below there, the $1.1070 level corresponds to a 50% retracement of the euro’s advance since the ECB underwhelmed investors last December. The US-German two-year spread widened by 13 bp last week, the most since November. Corrective upticks should be limited by the $1.1280 area. 

The dollar closed above the JPY110 level for the first time since the BOJ disappointed expectations by standing pat at the end of April. The US 10-year yield rose nine basis points, while the premium over Japan widened by 15 bp, on the week. The yen fell 1.4% last week, and its technical tone deteriorated. The next objective is the late-April highs in the JPY111.80-JPY112.00 area. Initial support is previous resistance provided by the JPY109.40-JPY109.65 band.

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