FX Market Summary 04-25-2014: Ukraine Tensions Underpin Yen

Japanese inflation data was the main focus in Asia on Friday, especially with the Tokyo data seeing the impact of April’s sales-tax hike. The annual core inflation rate moved to 2.7% from 1.0% previously, solely due to the tax impact. Weak underlying inflation will maintain pressure on the Bank of Japan for a more aggressive monetary policy.

European trading conditions were again generally lacklustre with little success in breaking out of narrow ranges as volatility levels remained at seven-year lows. There were no fresh comments from any key ECB members during the day.

There were important concerns surrounding the situation in Ukraine as tensions continued to increase. There was inflammatory rhetoric from the Ukraine Prime Minister, accusing Russia of wanting a third world war while the US threatened to introduce fresh sanctions on the Russian government.

The net outcome was yen and franc demand on safe-haven grounds with both currencies holding firm during the session as yen fundamentals were broadly ignored. USD/JPY dipped to test support in the 102 region while USD/CHF tested support near 0.88.

Markets were braced for a weaker than expected UK retail sales report following the unexpected strength seen last month. Traders were also on alert for an erratic figure given the uncertain impact of seasonal factors within the data. In this context, GBP/USD dipped lower into the release and tested support below 1.6800.

In the event, the headline data was stronger than expected with a 0.1% gain for the month which supported Sterling even with a downward revision to February’s data and GBP/USD tested resistance above 1.6820. From a medium-term perspective, greater dependence on borrowing and a weaker than expected release for mortgage lending could maintain doubts surrounding the sustainability of growth, but shorter-term dynamics dominated ahead of GDP data next week.

US data releases were again mixed and failed to provide any dollar traction. An upward revision to the University of Michigan consumer confidence to 84.1 for April from a flash 82.6 was offset by a weaker than expected Markit PMI services index at 54.2 from 55.5 previously. There was a suspicion that short-term players were holding short Euro positions which increased the potential for short covering ahead of the weekend and EUR/USD drifted higher towards the 1.3850 level.

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