FX Market Summary 03-31-2014: Positioning Protects Euro

Risk conditions were generally firmer during Monday with immediate political and economic concerns easing to some extent. Although talks between Russia and the US over Ukraine failed to reach any substantive agreement, there was relief that dialogue was continuing with a slightly more conciliatory tone. On economic grounds, there was further speculation over a Chinese stimulus which helped offset debt fears. USD/JPY built on Friday’s gains with a peak just above 103.40.

The closely-watched Euro-zone inflation data was slightly weaker than expected with a headline rate of 0.5% for March from 0.7% previously which was a four-year low for the index. The data triggered immediate selling pressure on the Euro with a EUR/USD slide to the 1.3720 area on speculation that the ECB would be forced to loosen policy. The core rate was in line with expectations at 0.8% which negated the impact to some extent and there were further doubts whether the ECB would be ready to commit to policy action this week.

Failure to break lower triggered a round of short covering and there was also considerable positioning and window-dressing activity as the first quarter came to a close. The Euro was able to more than recoup lost ground and EUR/USD pushed higher to the 1.3800 area early in New York.

There was no dollar support from the US economic data with a decline in the Chicago PMI index to 55.9 for March from 59.8 previously. Comments from Fed Chair Yellen were generally dovish in context with a strong focus on the labour market. She commented that there is still a considerable amount of slack in the economy and labour market with the unemployment rate consistent with maximum employment likely to be in a 5.2-5.8% range. She also reinforced the case that a very loose monetary policy will be needed for some time. The comments curbed dollar demand even though US Treasury bond yields quickly moved to daily highs.

The latest UK housing data was slightly weaker than expected with a decline in mortgage approvals for February. The lending data was close to expectations while money supply growth recovered slightly. A fall in business lending reinforced medium-term doubts surrounding the outlook, but markets were focussed mainly on shorter-term timeframes. GBP/USD continued to fluctuate near the 1.6650 resistance area and recovered from intra-day lows around 1.6610 to make a fresh challenge on 1.6650.

The Canadian dollar was boosted by stronger than expected GDP data with USD/CAD sliding to re-test the 1.10 area for the second successive session before finding some buying support.

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