FX Market Summary 02-20-2014: French Concerns Undermine Euro

Minutes from January’s Federal Reserve policy meeting indicated that several Fed officials were looking to drive home the idea that further tapering of bond purchases would take place in a predictable manner over the rest of 2014. Some members did take a more cautious tone which was broadly predictable given the diversity of opinion within the committee and economic conditions will be watched very closely. There were potentially significant comments suggesting that financial stability should appear more explicitly in the list of factors which would guide decisions about the Fed funds rate.

The dollar found some support from the minutes as EUR/USD retreated towards the 1.3725 area. As has been the case throughout the past few days, the dollar was unable to secure sustained support with EUR/USD moving back to the 1.3750 area on Thursday.

This defensive tone surrounding risk appetite was sustained during the Asian trading session on Thursday following a weaker than expected reading for the Chinese HSBC PMI index. The flash reading dipped to 48.3 for February from 49.5 previously which was a 7-month low for the index and triggered a further deterioration in risk conditions.

The latest Japanese trade data was weaker than expected with an adjusted JPY1.82trn deficit for January which will maintain major unease surrounding longer-term Japanese fundamentals as the balance of payments position has shown a sustained deterioration. Although this will be a negative medium-term yen factor, risk conditions were a more important short-term factor and USD/JPY retreated to the 101.90 area.

The latest French PMI flash data was sharply weaker than expected with notable declines for both the manufacturing and services sectors and the German manufacturing data was also disappointing which raised fresh concerns over the growth outlook. In response, EUR/USD dipped sharply to test support in the 1.37 region.

The US inflation and jobless claims data did not have a major impact, but there was a much weaker than expected reading for the Philadelphia Fed index which triggered fresh doubts surrounding the US outlook. EUR/USD attempted a limited recovery before edging back towards the 1.37 area as GBP/USD again tested support below 1.6650 while USD/JPY regained the 102 level.

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