FX Market Summary 06-27-2014: Dollar Stays Adrift

Currency markets have continued to lack any energy or dynamism over the past 24 hours with the approaching weekend a further drain on what little activity remained with the dollar unable to make any headway.

The latest Japanese inflation data was in line with expectations with a core 3.4% annual increase, the highest rate since 1982. There was a very sharp decline in household spending which will potentially cause major concerns, although the retail sales data was more encouraging which will maintain uncertainty over underlying direction and potential policy action.

The dollar overall was undermined by a decline in US bond yields to the lowest level since early June with USD/JPY dipping to five-week lows near 101.30 during the Asian session.

The latest inflation data was weaker than expected in Spain with an annual consumer prices increase of 0.1% from 0.2% previously, but the preliminary German national release was slightly stronger than expected with an annual 1.0% gain. The ECB will continue to monitor inflation developments with no further action in the short term which dampened potential market interest in the data.

UK first-quarter GDP growth was unrevised at 0.8%, in line with expectations, while there was a stronger reading for investment which triggered some underlying confidence over the medium-term outlook. The current account deficit narrowed to £18.5bn from £23.5bn previously, but this was still close to 5% of GDP and an underlying Sterling burden.

Although there are continuing expectations that the Bank of England would move to raise interest rates within the next few months, Sterling was vulnerable to profit taking and position adjustment into the weekend, especially given that rates hikes are priced in. GBP/USD failed to hold near 1.7050 and dipped towards 1.7000 late in Europe while EUR/GBP moved back above 0.8000.

Some Euro demand on the cross helped underpin EUR/USD and the rate edged higher to the 1.3630 area with bulls taking further comfort from the ability to hold 1.3580 and also looking to force a short squeeze into the weekend.

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