Markets were confined to narrow ranges on Wednesday, waiting for the latest Fed minutes and a key-note speech by ECB president Draghi later in the day for further evidence on likely monetary policy trends. Dovish comments from Minneapolis Fed President Kocherlakota had dampened dollar support despite evidence that the labour market is strengthening more quickly than expected.
There was a slightly weaker than expected reading for Chinese inflation which undermined risk appetite to some extent on fears over a sustained slowdown in the economy. The dollar was still able to find support at lower levels with markets still generally bearish surrounding longer-term yen trends with very weak fundamentals. After finding support below 101.50, USD/JPY edged higher to the 101.60 area.
The UK BRC shop-price index recorded a 1.8% decline in the year to June from 1.4% previously, the lowest figure since 2006 which will tend to curb pressure for a near-term increase in interest rates and also limited Sterling support to some extent. Sterling was subjected to a further round of profit taking as yield expectations edged slightly lower and GBP/USD dipped to lows below 1.7100 before again finding solid buying support.
In testimony to the Treasury Select Committee, incoming Bank of England MPC member Shafik stated that there were few signs inflationary pressures with the outlook depending crucially on the amount of slack within the economy. These dovish elements were offset by comments that estimates of the amount of slack are likely to be downgraded in the bank’s next report and there was still caution ahead of Thursday’s rate decision with GBP/USD moving to 1.7140.
EUR/USD initially moved higher to the 1.3630 area in Europe, underpinned by reported comments from ECB Coeure who stated that the Euro was not over-valued, contrary to thinking within the French government. Underlying selling interest pushed EUR/USD back to the 1.3600 area with reports of a sizeable option barrier at the 1.3600 level attracting the spot rate.
As Wall Street opened, there was some underlying dollar selling pressure as EUR/USD recovered to the 1.3640 area on short covering and USD/CHF dipped back towards 0.8910. Overall ranges were, however, still narrow as activity faded ahead of key events later in the day as USD/JPY held around 101.70 as stocks attempted to rally.