FX Market Summary 01-09-2014: ECB Vigilance Caps Euro

There was a broadly uneventful Asian session on Thursday with the latest Chinese inflation data not having a major currency impact. The Euro held broadly stable in Europe with EUR/USD gaining support from the ability to hold 1.3550 support on Wednesday while there was solid selling interest on rallies. There was a stronger reading for German industrial production and Spanish yields continued to decline, but French concerns increased following a lacklustre Treasury auction.

As expected, the ECB left interest rates on hold following the latest council meeting which ensured that the main focus of attention was on President Draghi’s press conference. He stated that current monetary conditions were acceptable, but also that the ECB had used stronger language to reinforce its forward guidance. The bank wants to avoid any unwanted upward pressure on money-market rates and will also resist any deterioration in the inflation outlook, in other words will be prepared to act on any increased evidence of deflation.

The US jobless claims data was better than expected with a decline to 330,000 in the latest week from a revised 345,000 previously. This release, combined with the better than expected ADP data from Wednesday, maintained underlying optimism surrounding Friday’s payroll release which also helped underpin the dollar on a trade-weighted basis.

The solid US data and more dovish than expected ECB rhetoric pushed EUR/USD lower with a re-test of 1.3550 support from a pre-conference peak around 1.3630. Maintaining the recent trend, the dollar was again unable to take advantage and break through major technical levels with EUR/USD rallying back towards 1.36 late in Europe. USD/CHF was again repelled above the 0.91 level and USD/JPY failed to hold the 105 level while USD/CAD tested the highest level since 2009 with a peak at 1.0870.

There were no surprises from the Bank of England with all monetary policy instruments left on hold following the latest policy meeting. There had been some speculation that the MPC would strengthen its forward guidance by releasing an updated statement and the absence of a statement gave a further short-term boost to Sterling.

EUR/GBP remained under pressure with fresh 12-month lows below 0.8250 and GBP/USD spiked to highs just short of 1.65 early in the New York session. There was no significant improvement in the latest UK trade data and the deficit remains an important longer-term concern, but the immediate market impact was limited.

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