The dollar attempted to rally at times during Tuesday, but struggled to make any impression on resistance levels and was generally weaker for the day as a whole with potential buyers reluctant to make any fresh commitment ahead of key event risk later in the week.
Although the German ZEW business confidence was weaker than expected with a decline to 36.3 for July from 38.5, the overall impact was limited with no sustained selling pressure on the Euro and EUR/USD quickly found support below 1.3050.
The US data releases did not have a decisive market impact with a higher than expected consumer prices increase on 0.5% countered by an in-line core reading of 0.2%. While the industrial production index was in line with expectations, there was a stronger than expected NAHB housing index which pushed to fresh seven-year highs at 57.
Overall market positioning continued to have a negative dollar impact. There was further uncertainty ahead of Fed Chairman Bernanke’s crucial testimony to Congress on Wednesday and Thursday. Given the very sharp dollar decline following Bernanke’s speech last week there was a reluctance to extend long positions at this time.
The stronger than expected US housing data did help underpin the dollar against the yen as USD/JPY found support on dips to the 99.25 area as firmer risk appetite curbed yen demand.
There was an increase in the UK inflation rate with consumer prices rising 2.9% in the year to June from 2.7% previously. Markets had been expecting a more substantial increase which curbed immediate Sterling demand. There were also still concerns surrounding the impact of falling real incomes on consumer spending levels given that inflation was at 2.9% while reported incomes growth is around 1.0%.
With caution ahead of Wednesday’s Bank of England minutes with markets looking for further details on forward guidance and unsure how dovish the MPC will be under new Governor Carney, Sterling was on the defensive. EUR/GBP strengthened to a high above 0.87 for the first time in over four months while GBP/USD continued to hit additional supply on any move above 1.51.
The latest Australian Reserve Bank minutes were slightly more hawkish than expected as the bank showed some reaction to recent sharp Australian dollar falls. The bank warned that a weaker exchange rate would have some impact on inflation and this will make it less likely that interest rates will be cut again in the near term. In this environment, AUD/USD rallied strongly with a move to above 0.92.