Price action on Thursday continued to be dominated by the aftermath of Wednesday’s Federal Reserve meeting. In particular, markets continued to focus on Chairman Bernanke’s comments that if the economy performed in line with expectations, then the quantitative easing programme could be completed during 2014 and scaled back later in 2013.
These comments reinforced market expectations that there would be a tapering of bond purchases, potentially during the third quarter. The dollar continued to advance against all major currencies as the trade-weighted index moved sharply higher and breached the 200-day moving average.
There was further selling pressure on US and global bonds as markets continued to price-in a less accommodative stance while equities fell sharply. The yield on the benchmark 10-year bond increased sharply to a high above 2.45%, the highest since October 2011 which triggered fresh dollar demand.
Emerging-market currencies remained particularly vulnerable with the Turkish lira for example dipping to record lows as carry trades were liquidated. There was also a sharp sell-off in commodities and precious metals as gold dipped to 2013 lows.
The latest Chinese economic data was weaker than expected with a decline in the flash HSBC PMI index to a nine-month low of 48.3 from 49.2. There was a further spike higher in Chinese money markets as the PROC refused to ad additional liquidity and there were rumours that the Bank of China had defaulted on a scheduled payment. This combination of pressures proved extremely toxic for the Australian dollar as AUD/USD fell to three-year lows below 0.92.
The Euro-zone data releases were slightly stronger than expected with the PMI manufacturing index rising to 48.7 from 48.3 previously while the services component also registered a significant improvement. The data boosted confidence that the Euro-zone economy was at least starting to stabilise and this curbed immediate Euro selling.
The US PMI manufacturing index was marginally lower at 52.2 for June from 52.3 previously while jobless claims rose to 354,000 from a revised 336,000. The data initially relieved some of the pressure on bond prices as yields dipped to below 2.40% which also had some restraining influence on the dollar. A rise in existing home sales, however, to the highest level since November 2009 and a sharp rise in the Philadelphia Fed index sparked a fresh leg higher for the dollar as EUR/USD dipped to 1.3160 lows.
After plunging overnight, Sterling was able to resist further selling on Thursday as GBP/USD found support on approach to the 1.54 area. There were strong gains against the Euro with UK sentiment boosted by a much larger than expected May retail sales increase of 2.1%. Sterling rallied towards 0.8525 against the Euro in the US session as GBP/USD held steady.