FX Market Summary 06-17-2014: Inflation Data Boosts Dollar

The Australian dollar was the main move in overnight trading Tuesday following the latest Reserve Bank policy minutes. The overall tone was slightly more dovish than expected with the bank less confident that stimulus measures already in place would be sufficient to support the economy. AUD/USD dipped lower in response as it lost its hold on 0.9400 with lows below 0.9350.

There was a busy data schedule during the day which certainly sparked significant market movement. First up was the UK consumer inflation data, very closely watched given monetary-policy implications and heightened alert over a potential rate hike. The headline inflation rate dipped to 1.5% for May from 1.8% previously and this was the lowest reading since Autumn 2009.

Producer prices data was also benign, dampening expectations that the Bank of England would need to take an aggressive stance. GBP/USD spiked lower to the 1.6930 area, but quickly recouped ground given underlying support and generally hawkish comments from bank officials. Rally attempts again stalled just below the 1.7000 level as EUR/GBP tried to regain the key 0.8000 level.

There was a weaker than expected reading for the German ZEW business confidence index at 29.8 for June from 33.1 previously, the weakest figure for 18 month. Potential Euro damage was limited by an optimistic current conditions index and EUR/USD was able to hold above 1.3550 despite bearish underlying sentiment.

US housing data was slightly weaker than expected with a decline to an annual rate of 1.00mn for May from 1.07mn previously and permits also declined over the month. In contrast, the latest consumer inflation data was stronger than expected with a headline increase of 0.4% for the month and a core increase of 0.3%, the first time it has hit that level since early 2013. The annual inflation rate also hit the highest level since Autumn 2012 at 2.1%.

The inflation data came at a particularly sensitive time given the Federal Reserve FOMC meeting gets underway Tuesday and there was increased speculation that the Fed would need to take a more hawkish tone, especially as it does not want to be seen as behind the curve. The dollar strengthened in response with EUR/USD dipping to lows below 1.3540.

USD/JPY had already moved higher during the Asian and European sessions, pushing higher again following the US data. As US yields moved higher, there was a peak around 102.20.

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