Overnight, the Turkish central bank delivered a powerful increase in its key increase rate to 12% from 7.75% which helped ease emerging-market tensions, at least in the very short term, and also curbed defensive demand for the yen as Asian currencies traded with a more settled tone. With expectations of further Fed tapering, USD/JPY pushed towards the 103.50 resistance area.
The latest Euro-zone money supply data was again weaker than expected with an annual increase of 1.0% from 1.5% previously while private lending continued to contract at a rate of 2.3% in the latest 12 months. The data will reinforce concerns over the growth outlook and maintain pressure for a more aggressive ECB policy. These economic fears tended to steer EUR/USD from any further test of resistance in the 1.37 area and it drifted weaker.
The more favourable tone in risk appetite unravelled during the European session with emerging-market currencies subjected to renewed selling pressure. The underlying defensive tone prevailed, especially with expectations of further Fed tapering adding to potential capital outflows from emerging markets.
USD/JPY was the main conduit for pressure with a decline to lows at 102.0 early in New York. With the Euro also losing ground against the Japanese currency, EUR/USD retreated to test significant technical support just above 1.36.
Trading conditions were inevitably choppy with an inevitable reluctance to maintain aggressive positions ahead of the Fed statement, amplified by fears over erratic moves triggered by emerging-market turbulence.
As has been the case over the past few days, the Euro still managed to gain safe-haven support when emerging-market tensions increased. In this environment, EUR/USD rallied hard to the 1.3670 area as shorts were quickly forced to cover positions with liquidity fading.
Another solid increase in the UK Nationwide house-price index initially helped underpin Sterling. Comments from Bank of England Carney were broadly in line with recent statements. He reiterated that the central bank was in no hurry to increase interest rates and that the 7% unemployment rate was not a threshold for increasing interest rates.
Having again failed at the 1.66 area, GBP/USD initially fell sharply to lows around 1.6525 before regaining ground as the US currency was subjected to renewed selling pressure while GBP/JPY tested support below the 170 level.