FX Market Summary 07-31-2014: Dollar Remains In Charge

The dollar held a firm tone on Thursday without being able extend gains from an over-bought position.

There was no surprise with the Fed policy decision late on Wednesday with a further US$10bn tapering of bond purchases to US$25bn per month. The FOMC statement did make comments on the economy being stronger while references to unemployment being at elevated levels was dropped. There was, however, still considerable caution with comments that considerable amount of slack in the labour market remained.

Inflation was described as moving somewhat closer to the long-run objective. Plosser dissented from the vote, objecting to the language that interest rates should stay low for a considerable time. The statement overall did not contain as many hawkish references expected by parts of the market as the Fed looked to make only very measured changes to language. The dollar dipped from its strongest levels. USD/JPY retreated from 12-week highs just above 103.00 with the Euro edging back towards 1.3400.

Thursday’s early Euro-zone releases offered some support with stronger than expected data for German retail sales and French consumer spending while German unemployment also declined for the first time in three months and Italian unemployment dipped to 12.3% from 12.6%. The Euro was unable to take significant advantage with EUR/USD unable to regain the 1.3400 level as longer-term sentiment remained bearish.

The latest Euro-zone flash consumer inflation reading was weaker than expected with a decline to fresh four-year lows of 0.4%, maintaining pressure on the ECB. The inflation data also tended to put further downward pressure on Euro-zone bond yields. With US benchmark 10-year bond yields above 2.55%, spreads in the dollar’s favour widened to fresh multi-year highs.

US jobless claims held close to the 300,000 level in the latest data while there was a stronger than expected reading for employment costs which maintained concerns surrounding inflation and EUR/USD dipped back below 1.3370.

This fresh dollar advance stalled after a much weaker than expected reading for the Chicago PMI index at 52.6 from 62.6 previously. Although a very volatile series, there was some fresh doubt surrounding the growth outlook and EUR/USD rallied to near 1.3400 once again. Dollar dips still attracted buying support and AUD/USD, for example, remained under pressure with a slide to 8-week lows below 0.9300.

Sterling remained on the defensive throughout the past 24 hours with a slide to 8-week lows near 1.6850 against the dollar. Month-end positioning again took a toll while there was further evidence of profit taking on long positions. A weaker than expected consumer confidence reading and cautious remarks from MPC member Broadbent over the impact of Sterling strength on inflation increased corrective pressures as EUR/GBP reached 0.7940 on the back of Bundesbank buying.

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