Sterling was the main winner on Wednesday with the dollar also fighting back against the majors. The Bank of Japan left policy on hold following the latest policy meeting. There was a more optimistic tone surrounding capital spending which helped provide near-term support for the Japanese currency. USD/JPY remained firmly on the defensive with lows near 100.80 as 101.00 support and barrier interest gave way.
Sterling pushed sharply higher early in the European session on Wednesday with GBP/USD breaking above the 1.6850 level. There were rumours of a split within the latest Bank of England MPC minutes which triggered buying and there was also a suspicion of front-running into the latest retail sales release.
In the event, the sales data was much stronger than expected with a 1.3% increase for April following a revised 0.5% advance for March. Despite seasonal distortions, there was further Sterling buying support. There were unanimous votes for interest rates and quantitative easing to be left on hold within the BoE minutes. There was, however, some variance of opinions over the amount of slack in the economy and some members stated that the bank was moving closer to a rate increase.
The net market interpretation was that the likely timing of higher interest rates had been brought forward. Sterling spiked higher again following the release with a peak above 1.6900 against the dollar. There was an even sharper move against the Euro as EUR/GBP dropped rapidly through the 0.81 level for fresh 16-month lows.
Selling pressure on the crosses exacerbated underlying EUR/USD vulnerability during the European session. Underlying sentiment also remained negative on expectations that the ECB would take action at June’s policy meeting. Although there was a further current account surplus for March, the capital account was weaker which increased speculation that the investment cycle was turning less favourable for the Euro-zone.
There was a weak German bond auction which was technically uncovered on a lack of bidding support and this further unsettled the Euro on speculation that peripheral bond yields would be pushed higher.
EUR/USD dipped early in New York and tested the pivotal 1.3650 support area where buying interest appeared as Sterling held a robust tone. Early gains for US equity markets and a small increase in US benchmark bond yields pushed USD/JPY back to the 101.50 level on an aggressive round of bargain hunting. A recovery in the dollar’s trade-weighted index also helped to provide underlying support with caution ahead of the Fed minutes later in the day.