FX Market Summary 05-30-2014: Positioning Dominates Price Action

Markets were unable to break significant resistance levels on Friday, although positioning considerations did trigger significant volatility in choppy conditions.

There was a sharp increase in the Japanese core national inflation rate to 3.2% for April from 1.3% as the sales-tax increase took effect which maintained expectations that the Bank of Japan would be more cautious over further quantitative easing. This provided some yen support, offset by a weaker than expected industrial production release. USD/JPY was unable to break above 101.80 and edged back to the 101.50 area as yield support remained weaker.

The latest Euro-zone inflation releases were both slightly below expectations with Spanish prices increases held to 0.2% in the year to May while Italian prices fell over the month to give a 0.5% annual increase. The data will reinforce expectations over a weak Euro-zone release next week which would increase pressure on the ECB ahead of Thursday’s council meeting. There was also a weaker than expected German retail sales report.

The initial round of US data releases were very close to expectations which did not have a major impact as EUR/USD continued to consolidate just above the 1.3600 level. Month-end positioning continued to have a significant impact during the day with the dollar struggling to make much headway and EUR/USD attempted a limited recovery to the 1.3630 area.

There was a stronger than expected US Chicago PMI release at 65.5 for May, the highest level for seven months, which helped trigger a sharp bond-market correction as US benchmark yields recovered from 11-month lows. Higher yields also helped underpin the dollar with EUR/USD unable to gain further traction.

Higher US yields were also significant in curbing yen demand as USD/JPY again bounced off support near 101.50 for a move to 101.80 with EUR/JPY also moving strongly away from the 138.0 area.

Optimistic UK business surveys from both the Chambers of Commerce and the CBI failed to have a major impact, but GBP/USD did find further support on approach to the 1.67 area with a move to test resistance above 1.6750 as the dollar drifted weaker against European currencies.

Industrial commodity prices were still broadly vulnerable during the day which hampered the Australian dollar as AUD/USD failed to break the 0.9320 resistance area. Weaker than expected Canadian producer prices and a lacklustre GDP report pushed USD/CAD to a test of resistance above 1.0850.

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