During Asian trading on Tuesday there was speculation that the Japanese government would introduce a cut in corporate taxes to help offset the planned sales tax increase. In response, there was a sharp rise in the Nikkei index and regional bourses also made ground which helped undermine the yen, especially with risk conditions generally firmer. The dollar was able to secure fresh momentum and USD/JPY pushed to highs above 97.50 into the European session.
EUR/USD was initially confined to narrow ranges around the 1.33 level with support on dips lower as European trading volumes remained uninspiring. The headline German ZEW data was stronger than expected with an increase to 42.0 for July from 36.3 previously, maintaining the general run of stronger than expected German releases.
The data also boosted expectations that Wednesday’s GDP data would register wider Euro-zone growth for the first time in seven quarters. EUR/USD initially moved higher, especially after the ZEW economists speculated that the ECB could increase interest rates, but it was unable to sustain the gains above 1.33 and drifted lower into the New York open.
The headline US retail sales data was in line with expectations with a 0.2% monthly gain for July. A modest upward revision to June’s figure and a stronger than expected core increase of 0.5% did put a positive gloss on the figures. The dollar moved stronger against the European pairs as EUR/USD dipped to below 1.3265 and stop-loss selling triggered a move to lows near 1.3230 later in the US session.
The yen remained an important focus as USD/JPY pushed to highs above 98.0. The dollar was able to secure wider traction on Fed tapering speculation which it had not been able to do in the previous session. AUD/USD dipped back below 0.91 while USD/CHF rose to highs near 0.9350.
The UK consumer inflation data was in line with expectations with a small decline to 2.8% from 2.9% in the latest month. The housing data remained strong with the RICS housing-sentiment index rising to 36% for July from 21% which was the strongest reading since 2006. This reinforced optimism that housing-sector growth would support the wider economy with rising gilt yields still providing underlying Sterling support.
GBP/USD was unable to move above 1.55 and tended to drift lower on a generally firmer US currency. Sterling did maintain a solid tone against the Euro and there was a spike in New York activity as EUR/GBP suddenly moved lower while GBP/USD briefly hit the 1.55 area. There were reports that it may have been a misquote and the pair immediately moved lower again.