The Nikkei index retreated on Friday and there was further caution surrounding emerging markets which curbed any fresh yen selling pressure. USD/JPY was unable to break above the 103 level and drifted back to the 102.50 area during the Asian session with many regional markets closed for the lunar new-year holiday.
Month-end positioning had a significant impact on Friday, especially ahead of the weekend as well, with players unwilling to commit to aggressive positions. Most models suggested some dollar demand based on equity market moves during the month.
The Euro was undermined initially by a weaker than expected reading for German retail sales with a surprise 2.5% annual decline. The latest headline Euro-zone inflation reading was also weaker than expected with a flash headline annual price increase of 0.7% for January. Although the core reading was steady at 0.9%, the data served to increase overall fears that inflation will be too low.
EUR/USD dipped sharply in response with a decline to the 1.3520 area as the data increased pressure on the ECB. There was some shift in forecasts with some investment houses now expecting a rate cut at the February meeting.
There was a brief surge back to the 1.3570 area with a sudden deterioration in risk appetite boosting Euro demand on defensive grounds, but it was quickly back on the defensive with a test of the 1.3500 level in choppy trading.
There was a slightly stronger than expected reading for US personal spending which underpinned dollar sentiment even though it came at the expense of another significant decline in the savings ratio. Subsequent US data releases were broadly in line with expectations and did not have a major impact as technical and positioning dominated.
Players were looking to push the Euro weaker and trigger a raft of stops below the 1.35 level. After temporary respite, there was fresh selling and EUR/USD retreated to January lows near 1.3480. USD/CHF also moved to highs above 0.9060 before the dollar came off its best levels.
GBP/USD again found support on approach to the 1.6450 level and was able to consolidate just above this level in New York as EUR/GBP hit fresh 14-month lows below the 0.82 level.