FX Market Summary 01-30-2014: Deflation Fears Undermine Euro

There were no surprises from the latest US Federal Reserve decision as a further US$10bn tapering of bond purchases was announced to US$65bn per month. The statement continued to express cautious optimism surrounding the economic outlook, especially with fiscal drag easing, while maintaining some unease that inflation could stay too low. There was a unanimous decision with no dovish dissenters on the committee. Although the dollar held a firm tone, it struggled to gain any traction with USD/JPY testing support below the 102 level as tapering had been priced in.

The latest data registered a third successive week of overseas bond selling by Japanese institutions, illustrating caution surrounding global risk, but USD/JPY did find further support in the 102 area given expectations of further Fed tapering.

The Euro was again undermined on Thursday by weaker than expected data, this time on the inflation front. German regional states recorded a larger than expected decline in consumer prices for January, a trend confirmed in the national data with a 0.6% monthly decline and 1.3% annual increase. Significantly, stronger than expected German employment data failed to lift the Euro during the morning session.

The inflation data reinforced concerns that the Euro-zone faced deflation, increasing pressure on the ECB, and EUR/USD moved below 1.36 with stops triggering additional losses to lows just below 1.3570.

The latest US GDP data was in line with expectations at 3.2% for the fourth quarter while jobless claims were slightly higher than expected at 348,000 in the latest week. Neither of these releases provided much in the way of additional dollar support and the pending home sales data triggered another setback with an 8.7% monthly decline.

EUR/USD was unable to regain the 1.36 level despite US disappointment and drifted back to marginal new daily lows later in the US session. There was some slight moderation in the most pressing emerging-market tensions which curbed Euro demand and also triggered fresh yen selling as USD/JPY built on initially fragile gains with a high near 102.80.

Commodity currencies also gained some relief as AUD/USD found support on approach to 0.87 and rallied back to test the 0.88 area while USD/CAD was again thwarted by option-related defence on approach to the key 1.12 level. Sterling was unable to secure fresh buying momentum and GBP/USD retreated sharply to lows just below 1.6450 before finding support while EUR/GBP failed to hold gains above 0.8250.

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