Tokyo markets re-opened on Wednesday following the two-day break with the Nikkei index retreating to a 3-week low which tended to hamper risk appetite. There was also a further downturn in the China HSBC services PMI index which maintained concerns surrounding the Chinese outlook. In this environment, USD/JPY initially remained on the defensive with a test of critical support levels below 101.50.
A weaker than expected domestic retail sales report dampened enthusiasm for the Australian dollar despite the potentially significant upside break on Tuesday and there was selling interest above 0.9350.
Early Euro-zone data releases offered little Euro support with much weaker than expected reports for German factory orders and French industrial production. EUR/USD overall remained in consolidation phase below the 1.3950 level.
There were no further significant trading incentives ahead of the New York open with gains in a minor Euro-zone PMI retail report offering some economic support. There was an overall mood of caution ahead of Thursday’s ECB policy meeting and Draghi press conference with expectations that the central bank would resist any policy moves at this meeting. There was also caution ahead of Fed Chair Yellen’s congressional testimony later in the day.
There were some diplomatic noises surrounding the Ukraine situation from Russian President Putin which helped ease defensive yen demand to some extent and there was also dollar interest following the successful test of support. In this environment, USD/JPY moved higher to test resistance in the 101.90 area.
Sterling was also confined to narrow ranges and choppy conditions as markets digested the sharp gains seen over the previous 24 hours. There was pressure for a significant correction after rapid gains, but the potential for another crack at the GBP/USD 1.70 level continued to attract market interest with firm buying support on dips.
Yellen’s initial comments to the Senate banking committee were broadly dovish with a continued commitment to keeping interest rates at very low levels for some time after quantitative easing has been concluded. She also stated that the economy and labour markets had improved substantially, but were not yet healed.
Choppy price action was the main feature following Yellen’s comments. An initial EUR/USD move higher met strong selling interest above 1.3930, but a rapid retreat to near 1.3910 also brought a swift response from buyers. USD/JPY was unable to break above the 102.00 level and retreated to 101.60 before finding fresh support ahead of the Q&A session.