The dollar lost ground in Asian trading on Thursday as Japanese sources denied that the government was considering a move to cut corporate taxes to compensate for a higher sales tax. The Nikkei index dipped sharply and this also dragged USD/JPY to lows near 97.50 as the US currency also failed to secure additional yield support and EUR/USD moved briefly above the 1.33 level.
The UK economic data was again stronger than expected with retail sales rising 1.1% in July from 0.2% the previous month with hot weather conditions likely to have triggered additional spending during the month. Sterling was already holding a firm tone and GBP/USD pushed to 8-week highs near 1.56 ahead of the US open.
The latest US labour-market data was again stronger than expected with a decline in initial jobless claims to 320,000 in the latest reporting week from a revised 335,000 previously and this put claims at the lowest level since late 2007. There was also a solid reading for the New York Empire index which helped offset a weaker than expected industrial production reading. There was an increase in US yields as 10-year bond yields spiked higher following the data and the 30-year yield moved to the highest level since the fourth quarter of 2011 at just above 3.80%.
As far as inflation is concerned, headline and core consumer prices both rose 0.2% for July which was in line with expectations. Regional Fed President Bullard stated that there had been an improvement in the labour market. He was still concerned that growth rates were disappointing while low inflation could also still be a problem. In this context, he was undecided whether to back a tapering of quantitative easing at the September FOMC meeting.
EUR/USD maintained a solid tone ahead of the US open with a lack of fresh European incentives, but was unable to break above resistance levels. It then dipped sharply following the US data releases on greater speculation over Fed tapering while there was also a move to test support after the upside test failed. In this environment, EUR/USD dipped sharply to lows just above 1.32. There were wider gains for the US currency as USD/JPY regained ground with a peak above 98.50.
The Philly Fed index was slightly weaker than expected and EUR/USD found support on approach to 1.32. There was also profit taking in USD/JPY which pushed it back below the 98 level while AUD/USD fell sharply to below near 0.9050 before finding support.