Despite further unease surrounding the Chinese property sector and default risk, risk conditions were broadly stable during the Asian session on Tuesday with the dollar still struggling to make significant headway. AUD/USD also held firm as it attacked the 0.9100 area. EUR/USD drifted slightly weaker under the weight of EUR/JPY selling pressure as wider cross-related moves had a significant market impact during the day.
The German ZEW business confidence reading was weaker than expected with a third successive monthly decline to 46.6 for March from 55.7 previously with respondents citing the Ukraine situation as having a significant impact. EUR/USD dipped to below the 1.3900 level before finding renewed support.
Political tensions surrounding Crimea, Ukraine and Russia had an important market impact in very choppy trading conditions during the European session. Russian president Putin’s remarks to parliament were generally considered slightly more conciliatory than expected which spurred an immediate improvement in risk appetite. USD/JPY moved sharply higher to the 101.70 area from 101.30 and strong demand on the EUR/JPY cross also triggered a strong move higher in EUR/USD which moved to the 1.3940 area.
There was a more cautious interpretation later in the new York session as Ukraine insisted that it would not recognise the Crimea move and USD/JPY retreated from its best levels with a move back through 101.50.
The latest US economic data was broadly in line with expectations with headline and core CPI both registering monthly changes of 0.1%. Housing starts data was close to expectations while there was a slightly stronger than expected reading for building permits which did not have a major impact on yields or policy expectations.
Sterling was again subjected to volatile trading during the European session on Tuesday. Several changes of personnel at the Bank of England had little immediate policy impact as Carney strengthened his grip on the MPC. After another failure to break above resistance in the 1.6650 area, GBP/USD retreated to test support below the 1.66 level as EUR/GBP strengthened to 2014 highs around 0.8390. A fresh round of selling pushed GBP/USD to lows near 1.6550 in New York.
EUR/USD was unable to sustain the move higher and dipped to test support below 1.3900 in New York as markets looked to break the recent stranglehold of very narrow ranges. Dollar buying against Sterling helped to pull EUR/USD down as European currencies initially tended to move lower before moving higher once again as the dollar failed to sustain gains.