Trading conditions remained subdued during Monday, especially during the European session as narrow ranges prevailed. There was a high degree of caution ahead of key risk events this week with the Federal Reserve statement due on Wednesday following by the ECB and Bank of England interest rate decisions on Thursday. There are also key US economic releases, culminating in the pivotal Friday payroll report.
The latest Japanese retail sales data was slightly weaker than expected with 1.6% annual growth which did not have a major impact. Bank of Japan Governor Kuroda stated that it would take time to meet the 2% inflation target and there were some doubts whether the planned sales tax increase would be enacted by Prime Minister Abe. These doubts triggered renewed downward pressure on the Nikkei index with a 3.1% decline which, in turn, triggered yen buy orders against the dollar. USD/JPY dipped one-month lows below 97.70 before recovering ground while EUR/JPY dipped to below 130.
The latest IMM positioning data recorded only a small decline in long dollar positions, although there was a slightly larger drop of close to 25% in the value of Euro shorts. The data overall will maintain the potential for a market squeeze on long dollar positions even if the Euro is not the main beneficiary.
Technical considerations were also important with reports of further option-related EUR/USD selling on approach to the 1.33 level. After again hitting resistance close to this level, EUR/USD dipped to test support in the 1.3250 region where solid buying support again emerged into the European close.
The latest US pending home sales data recorded a small decline of 0.4% for June following a revised 5.8% gain the previous month which did not have a significant impact on interest rate expectations. There was further debate surrounding potential successors to Fed Chairman Bernanke with former White House economic advisor Summers and current vice-Chairman Yellen still assumed to be the frontrunners.
The latest UK Hometrack house-price index recorded a further small July increase, maintaining expectations of a firmer tone in the housing sector, but price action suggested this may now be priced in and a firm CBI retail survey also had little effect. GBP/USD did make a brief foray above the 1.54 level, but this was quickly repelled and there was a decline to below 1.5350, primarily due to a wider dollar recovery against European pairs.