FX Market Summary 06-20-2014: Dollar Fights Back

Trading conditions were relatively lacklustre during Asian trading on Friday and there were no major data releases on either side of the Atlantic. Volatility did move higher during the day as the dollar looked to stage a recovery from Fed-induced losses.

There was some reassessment by major investment banks of this week’s Federal Reserve policy statement with commentary that the market reaction had either been mis-placed or certainly represented an over-reaction. In this context, there was speculation that Yellen had not been as dovish as originally reported and was more concerned over inflation prospects.

Inflation expectations will certainly be important and the bond market reaction will also be crucial over the next few days and weeks. US yields tended to move slightly higher which underpinned the dollar. US benchmark 10-year yields moved to just above the 2.65% level, close to where they were ahead of the Fed statement.

Wider yield considerations remained important with Euro-zone money-market rates remaining as record levels below zero. EUR/USD was unable to make any impression on the 1.3650 resistance area and dipped to lows around 1.3580 ahead of the US open. USD/CHF continued the recovery seen yesterday with a move back to the 0.8970 area as USD/JPY attempted to sustain a move above 102.00.

The UK government borrowing data continued its mixed data set with some disappointment over the level of tax receipts, but the overall market impact was limited. Bank of England Deputy Governor Haldane stated that the low inflation rate eased pressure on the bank to raise interest rates which curbed bullish sentiment slightly. There was also further resistance above 1.7050 in GBP/USD which helped trigger profit taking and a retreat to near 1.7020 as trading wound down for the week. EUR/GBP was still on the defensive below 0.8000.

There were stronger than expected readings for Canadian consumer prices and retail sales with the headline annual inflation rate rising to 2.3%. USD/CAD had already been generally on the defensive over the past 38 hours and the stronger data releases pushed it to lows near 1.0750, the weakest level since early January.

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