FX Market Summary 01-22-2014: Sterling Surges Again

There has been no shortage of volatility over the past 24 hours, although much of the action has been away from the pivotal EUR/USD pair. During Asian trading on Wednesday, there was a much higher than expected reading for Australian inflation with a 0.8% headline fourth-quarter gain compared with expectations of a 0.5% increase and the core reading was also stronger than expected. The Australian dollar spiked higher with an AUD/USD move to a peak near 0.89 from just above 0.88.

There was no surprise from the Bank of Japan with the pace of quantitative easing left on hold at the latest policy meeting. The yen gained some immediate support with some hints from BOJ chief Kuroda that the bank might be less forthcoming than expected with fresh easing later this year. USD/JPY dipped to lows at 104.00 before rallying again to the 104.40 area.

The latest UK labour-market data was a highly-anticipated event and was certainly no disappointment. There was a slightly smaller than expected decline in the claimant count, although it was the 14th successive monthly drop. Principal attention was on the unemployment rate which fell more sharply than expected to 7.1% from 7.4% previously which was the lowest rate since May 2009. Crucially, the drop also brought the rate close to the 7.0% threshold contained within the Bank of England’s forward guidance.

The Bank of England minutes from January stated that there would be no need to raise interest rates immediately even if the unemployment rate hit 7%. Such rhetoric had little impact in restraining Sterling as EUR/GBP fell sharply to fresh 14-month lows below 0.82. GBP/USD also surged higher to a peak near 1.6580 with retail shorts again caught on the wrong side of the market.

As expected, the Bank of Canada left interest rates on hold at the latest policy meeting. The statement was generally dovish and USD/CAD pushed sharply higher to fresh four-year highs above 1.1050 following the decision.

Amid all the action elsewhere, EUR/USD was more pedestrian in comparison with relatively narrow ranges prevailing. Players were caught between underlying bullish dollar sentiment on tapering expectations and Euro resilience. EUR/USD found support on dips below 1.3540 and rallied to test resistance in the 1.3580 area later in the New York session as the failure to break support levels triggered another round of short-covering.

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