Euro Driven Higher By Short-Covering

The dollar struggled to hold onto its earlier gains against the Japanese yen that resulted from bullish U.S. economic data and a record high in the Dow Jones Industrial Average as short-covering in the EUR/USD cross coupled with pronounced technical resistance at 114.75 wiped out most of the dollar’s gains.

USD/JPY raced up to the session high of 114.75 on the back of a better-than-expected gain in the ISM services sector index, a significant gain of 1.25% from Friday’s U.S. close. But the 100-hour moving average stifled further advances for the dollar, resulting in a quick reversal that was amplified by a corresponding rally in EUR/USD as shorts scrambled to cover in reaction to the market’s response to Sunday’s referendum vote in Italy. USD/JPY fell back towards 113.00 but snapped back to 113.72, giving the dollar a positive close after two days of losses.

The euro was on the defensive early in the overnight session on the outcome to the Italian vote which ended with prime minister Matteo Renzi handing over his resignation. EUR/USD spiraled to a 21-month low of 1.0504 but was quickly catapulted to 1.06 before making a more sustained comeback as European traders reported to work.

Although Italian voters’ resoundingly rejected the government’s attempt to consolidate power, the fallout could be contained by the preservation of power by Renzi’s Democratic Party. Additionally, Renzi has been asked to delay his resignation until after a new budget is passed. The muted reaction to the outcome of the vote and ease with which the euro recovered spooked shorts who scrambled to cover ahead of the European close and before Tuesday’s EU GDP data for Q3. As a result, EUR/USD ended the day 1.25% higher at 1.0762.