FX Market Summary 08-28-2013: Sterling rebounds sharply

There were further important tensions surrounding emerging markets on Wednesday with the Indian rupee dropping to fresh record lows against the dollar while tensions surrounding Syria also remained high. The yen gained support on defensive grounds as USD/JPY dipped to test support below the 97 level.

There was some evidence that the Syrian tensions sparked greater dollar demand on Wednesday as the US edged closer to some form of military action, although there was still a high degree of uncertainty over any response.

The Euro-zone economic data offered no support to the Euro with a small decline in German consumer confidence. The increase in money supply growth remained at subdued levels and there was a bigger than expected contraction in private loans which will reinforce concerns over a lack of sustainable growth. This will also maintain pressure for a more aggressive ECB monetary policy over the next few months.

The US pending home sales data was weaker than expected with a 1.3% decline for July after a 0.4% drop the previous month. The overall impact was limited despite some speculation that stresses in the global economy would make it more difficult for the Fed to justify a tapering of bond purchases at the September FOMC meeting.

EUR/USD was again blocked on approach to the 1.34 level and, after a move down to the 1.3350 area, there was a sharp dip to lows near 1.3300. The dollar was again unable to break through this support level and there was consolidation slightly higher later in the New York session. The yen was unable to sustain its best levels as USD/JPY rebounded to around 97.80 after a successful test of support and the Swiss franc also came off its best level with USD/CHF moving back above the 0.92 level.

Sterling was subjected to selling pressure ahead of the speech from Bank of England Governor Carney with markets anticipating a generally dovish stance and GBP/USD weakened to lows below 1.5450. There was no follow-through selling following the comments which were broadly in line with expectations. Carney also announced a new scheme aiming to bolster bank lending by a further GBP90bn once financial institutions had met capital requirements.

The comments dampened immediate expectations that there would be any further move to bolster quantitative easing and Carney was also more optimistic surrounding the UK growth outlook. There was pressure to cover existing short positions following the release and GBP/USD rallied back above 1.55 as EUR/GBP hit heavy selling pressure on approach to 0.8650 with a retreat to 0.8580.

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