Markets endured a very lifeless Asian session on Tuesday with very narrow ranges dominating amid a lack of fresh incentives as Japanese reform proposals failed to create any excitement.
As far as the Euro-zone economic indicators are concerned, there was a weaker than expected German IFO index which declined to 109.7 for June from 110.4 previously, the lowest reading for five months, although moves have been relatively limited in an historic context. EUR/USD dipped to lows near 1.3580 before finding solid buying support.
Principal attention during the European session was on Bank of England testimony to the Treasury Select Committee on May’s inflation report. Governor Carney and other MPC members took a generally slightly more dovish stance with comments that the lack of upward pressure on wages suggested more than expected slack in the labour market. In turn, this suggested that an increase in interest rates could be delayed, especially if consumer inflation remained well behaved.
In response, Sterling dipped sharply with a slide to lows near 1.6970 for GBP/USD. Carney still delivered a mixed message, especially on his Mansion House speech where he had indicated that interest rates might need to rise earlier than expected by the markets. This was described as a personal view, but also that it was designed to shift market expectations in a pre-meditated move. Sterling recovered quickly as GBP/USD edged back to the 1.7000 area while EUR/GBP attempted to hold above 0.8000.
Other pairs were generally lifeless ahead of the US open with AUD/USD declining to the 0.9380 area after failing to break above resistance near 0.9450 on Monday.
US consumer confidence was stronger than expected at 85.2 for June from 83.0 previously, the highest since early 2008 and the new home sales data was also stronger than expected at an annual rate of 504,000 from 433,000 previously. Again, this was the highest rate for over five years which helped offset a slightly weaker than expected reading for house prices.
There was a move higher in US 10-year bond yields which provided dollar support and USD/JPY looked to break above the 102.00 level with a peak around 102.10. EUR/USD dipped to lows just below the 1.3600 level with bears still unable to take out the more important 1.3580 support area.