Consolidation was the dominant theme during Monday following sharp currency moves and dollar gains seen at the end of last week. Activity is often subdued on the Monday following a US employment report and this was again the pattern seen this time around.
Technical considerations remained important with EUR/USD finding some support in the 1.28 area where an important base was formed during May. Ability to hold this area would increase speculation that a double-bottom has been formed and created some caution over aggressive selling.
Yield considerations also continued to have an important influence following Friday’s US payroll report which maintained expectations that the Fed would announce a tapering of bond purchases at the September FOMC meeting. There have been very sharp yield moves since the middle of June with the spread between US and German 10-year bond yields at the widest for seven years. Two-year spreads also moved to the widest level of 2013 which provided underlying dollar support.
The Euro-zone Sentix business confidence index dipped to -12.6 for July from -11.6 previously. There was also generally disappointing German data with a smaller than expected trade surplus for June and a decline in industrial output, although the overall market impact was limited.
There were weekend media reports that suggested ECB Chief Economist Praet had called for a 0.25% reduction in the benchmark refinance rate at last Thursday’s ECB Council meeting. The report also suggested that Bank President Draghi had backed the move to cut rates, but had effectively been out-voted by ECB members from stronger Euro-zone countries such as Germany and Holland.
The ECB head made no clear reference to these media reports in testimony on Monday, limiting his remarks to agreeing concerns expressed by the BIS over the risks posed by leaving interest rates too low for too long a period. To balance this he also emphasised that there was no case for raising rates at this time.
Sterling was a prime casualty late last week with GBP/USD declining by over four big figures in little more than 24 hours. There was inevitably pressure for a correction following such heavy losses and there was support on approach to the 1.4850 area with 2013 lows just below at 1.4830. Support here helped trigger a corrective recovery, especially as UK survey releases remained generally favourable with an upbeat assessment from Capital Economics.