FX Market Summary 02-12-2014: Sterling Moves Sharply Higher

A stronger than expected set of Chinese trade data helped underpin risk appetite which curbed yen demand and the dollar consolidated just below the 102.50 level in Asia on Wednesday as offers continuing to block any further progress.

There was a high degree of anticipation ahead of the latest Bank of England inflation report and certainly no disappointment in terms of market volatility. The central bank sharply upgraded its GDP growth forecasts for the economy while maintaining expectations that inflation would stay in check over the next two years.

The 7% guidance threshold for unemployment was maintained, but the bank also insisted that additional factors would be taken into account and suggested that the unemployment rate was over-stating strength within the labour market. Overall, the bank continued to estimate that there would be sufficient spare capacity in the economy to avoid having to tighten monetary policy this year.

There was a sharp dip in interest-rate futures following the report as markets continued to price-in an earlier rate hike even though longer-term gilt yield did not rise significantly. Sterling pushed sharply higher in response to the report with retention of the 7% threshold and initial market trigger. An initial GBP/USD spike to the 1.6550 area was met with significant selling interest, especially with the dollar generally stronger. There were renewed gains in the New York session as EUR/GBP fell very sharply to below the 0.82 level and close to 14-month lows.

EUR/USD was initially confined to relatively narrow ranges while being unable to make a significant challenge on resistance, undermined by the failure to break higher on Tuesday. The pair initially drifted lower, unsettled by fresh political turbulence in Italy and was then subjected to sharp selling pressure ahead of the US open.

There was selling interest on the main Euro crosses and pressure was exacerbated by comments from ECB member Coeure. He commented that the ECB was taking the possibility of negative interest rates very seriously even if the impact would probably be limited. EUR/USD dipped below the 1.3600/10 support area which triggered stop-loss Euro selling and there was a retreat to lows below 1.3570 before finding support.

USD/JPY again hit resistance above the 102.50 level and was generally confined to narrow ranges, unable to gain any fresh traction and hurt by EUR/JPY weakness, while USD/CHF tested resistance above 0.90.

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