Both the Euro and dollar were stuck in relatively narrow ranges during Wednesday with markets unable to generate any significant momentum. The Euro was unsettled by persistently dovish talk from the ECB and stresses within the banking sector. Actual monetary policy conditions are still tightening, however, which is preventing any significant Euro selling for now. The dollar was also undermined by policy uncertainty on both the monetary and fiscal fronts. EUR/USD found support in the 1.3460 area and rallied back above 1.35 ahead of the New York open.
The headline US durable goods orders data was close to expectations with a 0.1% increase for August following a revised 8.1% decline the previous month while there was a marginal decline in underlying orders. The data did not provide any significant support for the US outlook. There was an increase in new home sales to 421,000 for August from a revised 390,000 previously which did provide some degree of support for the housing sector, although the overall impact was still limited.
There was still an important underlying debate and discussion surrounding the outlook for Fed policy and tapering. On a shorter-term perspective, the issue was increasingly overshadowed by the political situation as Congress battled to prevent a government shutdown and raise the debt limit. Any negative impact on equities could underpin the US currency on defensive grounds, there were wider concerns surrounding the economic implications of brinkmanship, especially with reduced yield support.
The cautious tone towards a potential US shutdown had a significant impact in underpinning the yen as USD/JPY again tested support below the 98.50 level. As had been the case on Tuesday, buying support was again sufficient to pull the US currency off its lows as EUR/USD settled close to 1.35.
The UK CBI retail sales survey was stronger than expected with an increase to a 15-month high of 34 for September from 27 the previous month. Retailers were also optimistic that robust growth would continue during October which bolstered optimism surrounding the retail sector and the wider economy.
There was further speculation that the Bank of England would be forced to increase interest rates earlier than it would prefer and the UK currency also gained support from doubts surrounding US and Euro-zone fundamentals. In this environment, GBP/USD found support below 1.60 and pushed to highs above 1.6070 during the New York session. EUR/GBP also retreated to test support around the 0.84 level.