There has been an underlying mood of optimism surrounding the US outlook over the past 24 hours. There was an article in the Wall Street Journal from Fed watcher Hilsenrath, reinforcing the message that the Fed could announce a further tapering of bond purchases at next week’s FOMC meeting. This commentary provided support for the dollar, although market yields have already priced in a further move.
USD/JPY found solid support on approach to the 104 level on Tuesday and pushed to the 104.70 level on the back of Fed talk and underlying weak yen sentiment as equity markets also rallied.
The Canadian dollar was a big focus ahead of the New York open with USD/CAD hitting the 1.10 level for the first time since 2009. The pair pushed to highs around 1.1020 before being subjected to profit taking and a move back below 1.10.
The latest headline German ZEW index was slightly weaker than expected at 61.7 for January from 62.0 previously, but there was an improvement in current conditions which helped offset the impact with the Euro again subjected to choppy trading.
ECB policies remained an important focus and another ECB failure to fully sterilise bond purchases in the latest tender operation increased speculation that the bank was drifting towards further policy action and could consider quantitative easing in some form to prevent inflation from falling too low. There was a further underlying decline in peripheral bond spreads, notably in Ireland, which also tended to erode Euro yield support.
EUR/USD pushed weaker to lows around 1.3515, but short-term players were unable to push the pair below Monday’s Asian low and this triggered a renewed covering of short positions. The dollar also lost some ground against the yen as USD/JPY retreated to the 104.20 area.
There was further erratic Sterling trading during the day with the latest data release maintaining the choppy mood. Although the headline CBI industrial orders data was much weaker than expected for January, there was a strong reading for the quarterly data. GBP/USD initially fell retreated in line with a stronger dollar and tested support close to 1.64.
There were renewed gains in the New York session and a move back above 1.6450 as EUR/GBP retreated to fresh 12-month lows below 0.8220 with players unwilling to short the currency ahead of key economic events on Wednesday.