Asian equity markets held a firm tone on Friday and US bond yields remained above levels probed early in the week. This combination provided underlying dollar support and USD/JPY moved to test resistance near 102.00. The Australian dollar struggled to gain any significant benefit with AUD/USD continuing to register a series of lower highs and testing support below 0.9220.
The latest German IFO business confidence survey was weaker than expected with a decline to 110.4 for May from 111.2 previously with all series components registering a downturn. Although the index has been broadly stable over the past six months, there was increased speculation that the German economy was slowing.
Given that the German economy has been single-handedly propping up the Euro-zone as a whole, there were increased concerns over the implications for other major Euro-zone economies. With EUR/USD already struggling, there was fresh selling pressure following the data with a test of support below 1.3640. This area also held the important 200-day moving average and a break lower triggered fresh selling pressure on the pair with lows just below 1.3620.
Although sovereign rating upgrades for Greece and Spain had some positive impact, this was offset by unease surrounding the European Parliament elections which conclude on Sunday. The dollar was unable to gain further traction from a stronger than expected new home sales release and EUR/USD rallied to the 1.3635 area later in New York with some position adjustment also in evidence.
GBP/USD was also dragged down by selling pressure on European currencies with lows below 1.6830. There was some profit taking after strong Sterling gains while the uncertain political landscape was also important in curbing immediate buying interest as EUR/GBP looked to find a floor after heavy selling over the past two weeks.
The Canadian headline inflation data was in line with expectations as USD/CAD continued to hit resistance above 1.0900. A headline annual rate of 2.0% also dampened expectations that the Bank of Canada would be in a position to loosen monetary policy and, in this environment, USD/CAD dipped to 1.0875 lows.