The Nikkei index retreated to a 1-month low on Tuesday which initially underpinned the yen. The latest current account data remained weak with a record deficit for November and unadjusted shortfall of JPY593bn. Consumer demand increased ahead of the sales tax increase and energy imports remained high. The sharp underlying deterioration will be an important underlying negative fundamental influence on the yen as USD/JPY edged back to the 103.50 area following a successful test of support below 103.00.
Choppy Sterling trading was again an important feature during the European session. The latest UK headline inflation rate was lower than expected at 2.0% for December from 2.1% in November which was the lowest rate since late 2009 and the first time the Bank of England target has been met for over four years.
GBP/USD had moved sharply higher ahead of the release, partly in anticipation of a robust figure, and the below consensus data immediately put the pair under pressure with a move back to below 1.64. The UK currency did, however prove to be more resilient during the day and edged higher once again with gains to the 1.6450 area as EUR/GBP was unable to break above 0.8350.
ECB member Nowotny stated that Euro-zone growth could be stronger than expected which gave an initial boost to the Euro as EUR/USD spiked higher to just below the 1.37 level. There was solid selling interest at higher levels and an inability to break resistance pushed EUR/USD back to the 1.3670 area.
Although the headline US retail sales data was slightly weaker than expected as 0.2% with a downward revision to November, there was a higher than expected core reading of 0.7%. A sense of relief was evident with concerns over a weaker than expected figure and this did provide some net dollar support, although the impact was measured at best. EUR/USD continued to consolidate above the 1.3650 level while USD/JPY edged higher to 103.75 before hitting fresh resistance.
Caution remained a notable ingredient as Friday’s payroll data remained an unsettling influence. The underlying dollar tone remained more reserved with players uneasy surrounding the risk of a more substantial setback for the currency and EUR/USD regained ground late in the European session.