FX Market Summary 05-27-2014: Dollar Grinds Higher

The dollar was able to make some headway on Tuesday, underpinned by solid data releases and some underlying selling in European currencies.

Japanese and regional equity markets held a robust tone on Tuesday with the Nikkei index at a seven-week high. Although this limited support for the Japanese currency, USD/JPY was unable to break above the 102.0 level as EUR/JPY also met selling interest above 139.0.

There were no major data releases during the European session, but currency volatility did move higher as London markets re-opened following Monday’s holiday. The Euro was again hampered by a stream of dovish rhetoric with comments from ECB’s Nowotny fuelling expectations that there would be a rate cut at next week’s policy meeting.

There was a weaker than expected reading for UK BBA mortgage approvals which increased speculation that the housing sector could be slowing. The UK currency was also vulnerable on wider fundamental grounds during the day. Pfizer’s decision to abandon the merger attempt with AstraZeneca was a significant factor in undermining the currency with the premium built into Sterling on expectations of substantial capital flows being reversed.

Politically, there were also concerns surrounding the implications of victory in the European parliament elections by the UK Independence Party. There were also reports of month-end EUR/GBP buying by the ECB. In this context, EUR/GBP moved back above 0.8100 while GBP/USD reversed from early peaks just above 1.6880 to trade below 1.6820.

Precious metal prices were subjected to further selling pressure early in the New York session with gold probing towards 2014 lows. This had a significant impact in undermining the Canadian dollar as USD/CAD moved higher and also provided some wider US currency support with EUR/USD drifting lower to test support below 1.3640.

Headline US durable goods orders data was stronger than expected at 0.8% for April following a 2.9% gain the previous month, while core orders were broadly unchanged which limited any dollar support. There was a solid reading for house prices while consumer confidence rose to the highest level since early 2008. There was also an increase in the Markit PMI services index to the highest level since early 2012 at 58.4.

The data provided solid underlying dollar support as EUR/USD continued to test important support levels below 1.3640 and GBP/USD drifted towards the 1.6800 area. USD/JPY again approached the 102 area and attempted to break higher with markets still needing the spark of more hawkish Fed rhetoric to break substantially higher.

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