FX Market Summary 07-30-2014: Dollar Continues To Advance

The dollar advanced further during Wednesday as stronger US data boosted market sentiment for the second day running.

There was more bad fundamental data from Japan overnight with the 3.3% industrial production decline much weaker than expected and the fifth successive figure below expectations. The data will increase economic concerns and pressure on the Bank of Japan for more aggressive monetary policy which will tend to weaken the yen. USD/JPY initially edged higher to the 102.10 area ahead of key US events.

The Euro remained firmly on the defensive ahead of the US open with a slide to fresh 2014 lows just below the 1.3400 level with a notable feature being the absence of more than a marginal corrective recovery. GBP/USD also remained on the defensive at six-week lows below 1.6950. There was underlying caution ahead of key events during the New York session.

The first US release recorded a slightly weaker than expected ADP employment gain at 218,000 for July from 281,000 previously. Although there was a brief dollar dip, the US currency quickly recovered ground will willing buyers on dips as the data still suggested a solid underlying labour market. ADP data was also quickly over-shadowed by the latest GDP data with a headline second-quarter increase of 4.0% compared with expectations of 3.1% while there was also an upwards revision to the first quarter. Markets had spent an anxious few weeks fretting needlessly about the -2.9% first-quarter figure which this was revised away to -2.1%.

There was optimism surrounding business investment levels with the only potential drawback being a strong rise in inventories. The data overall was certainly dollar positive and EUR/USD dipped to fresh 2014 lows near 1.3370. There was an even sharper reaction in USD/JPY which broke above tough resistance in the 102.50 area with highs above 102.80.

Strong GDP data also bolstered market optimism surrounding the Federal Reserve statement later in the session. With markets more confident surrounding the potential for more hawkish rhetoric, the dollar maintained a bid tone with the Euro still unable to make any recovery. There will, however, be the risk of a sharp reversal if the Fed statement does not meet expectations.

GBP/USD remained under pressure with a slide to below the 1.6900 level while commodity currencies were also subjected to sustained pressure. USD/CAD broke higher to test the 1.09 area while AUD/USD retreated to lows below 0.9320, the weakest level since early June.

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