FX Market Summary 01-20-2014: China Caution Protects Yen

The latest Chinese GDP data was slightly stronger than expected at 7.7% for the fourth quarter from 7.8% previously which helped avert a further near-term deterioration in risk conditions. There was still a high degree of caution surrounding the Chinese financial sector due to fears of an impending credit crunch which maintained underlying caution surrounding regional growth prospects which lessened the threat of yen selling and limited Australian dollar support.

There was also still a very substantial net short yen position according to the latest CFTC data, maintaining the potential for a short-covering rally in the Japanese currency.  In this environment, the dollar was unable to gain any traction and USD/JPY dipped to test support below 104 with markets again nervous over the threat of potential position adjustment.

There were no major developments during the European session with markets lacking fresh incentives and anticipating lacklustre North American activity due to the Martin Luther King holiday. An improvement in Italian industrial orders and news of a deal surrounding political reform did not have a significant impact as technical considerations dominated.

EUR/USD was undermined by the decline through both the 100-day moving average and 1.3550 level on Friday. There were eight-week lows around 1.3510 before a retracement back to the 1.3560 area during Monday. There was still a reluctance to push the Euro sharply lower given its resilience over the past months and persistent ability to defy both bearish fundamentals and analyst’s expectations.

Sterling continued to gain support from optimism surrounding the growth outlook. There was a report that the IMF had significantly upgraded the UK 2014 GDP growth forecast to 2.4% from 1.9% which help offset comments from the ITEM group that interest rates should be held at record lows until income growth recovered. EUR/GBP consolidated around 0.8250 while GBP/USD probed resistance around 1.6450 after finding support near 1.6400 as markets also looked ahead to key employment data on Wednesday.

USD/JPY was unable to gain any fresh backing and again tested support below 104 as potential buyers remained wary over a deeper corrective retreat.

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