The UK economic data was much weaker than expected with industrial production registering a decline of 1.1% for August compared with expectations of a small monthly increase. The trade data was also worse than expected as the monthly goods deficit only fell marginally to £9.6bn for August from £9.9bn previously as the overall export performance remained disappointing.
The data increased fears both over the pace of the UK economy and the threat that growth remains very unbalanced and dependent on consumer spending growth which will not be sustainable. GBP/USD was already on the defensive and there was further evidence of stop-loss selling once the 1.6000 level was breached with lows below 1.5950 as damage was compounded by a generally firm dollar.
The Euro had pushed stronger late in the New York session Tuesday as the White House announced that current Fed Vice-Chairman Yellen would be nominated as Chairman of Governors on Wednesday. Markets expect that Yellen will maintain a very expansionary monetary policy and the news immediately weakened the dollar, especially with doubts whether there will be any tapering of bond purchases this year. The US currency regained composure with relief that uncertainty over the appointment had at least been alleviated.
The Euro remained vulnerable to a correction following the second failure to break resistance in the 1.36 region. There were also some hopes that the US would be able to stumble towards a deal over the government shutdown and debt ceiling, although uncertainty remained high with volatility spreading to the short end of the US bond market.
Regional Fed President Evans maintained a generally dovish tone with a call for more accommodative monetary policy and overall dollar sentiment was still fragile on fundamental grounds with markets still having to factor-in the possibility of a default.
Technical positioning remained important and a EUR/USD drop below the 1.3550 level triggered fresh selling with the pair moving to the 1.3500 level before finding some degree of support.
Yellen’s appointment did provide a boost to global equity markets and risk appetite on expectations for an expansive monetary policy. In this context, the yen lost some defensive support as USD/JPY again moved above the 97 level with a peak near 97.50. The Swiss franc also lost support as USD/CHF attempted to build a position above 0.9075 support.