Given major events later this week and the inability to break narrow ranges last week, there were few expectations of high volatility during Monday’s trading, but Sterling did move lower under the weight of profit-taking.
Japanese yields remain very unattractive both in nominal and real terms which will maintain pressure for an underlying shift of funds overseas. Although there are still important difficulties in boosting outflows given regulations, yield pressures will remain a potentially dominant underlying factor. USD/JPY was able to gain traction with solid support above 102.25 as improved sentiment towards Portugal also curbed any defensive yen demand.
Euro-zone data releases failed to provide any significant market impetus with a 1.1% decline in May industrial production in line with markets expectations and well flagged by earlier reported falls across individual countries.
Market positioning remained important with the Euro gaining some technical backing from the persistent ability to hold support below 1.3600 last week. Another successful defence in early Europe helped trigger a short squeeze and push to the 1.3640 area where selling pressure started to increase again given longer-term expectations of Euro vulnerability.
Commitment was also again lacking given the low level of trading volumes and recent narrow ranges. There was also a reluctant to commit ahead of important congressional testimony on Tuesday and Wednesday by Fed Chair Yellen. In this environment, EUR/USD dipped back to the 1.3620 area early in New York. A solid start on Wall Street helped push USD/JPY above the 101.50 level as EUR/JPY regained 138.00.
There was some element of uncertainty surrounding the UK growth outlook, especially with some of the most recent indicators having a weaker than expected tone. There was also caution ahead of Tuesday’s inflation data with any undershoot increasing pressure on the Bank of England to hold rates steady.
GBP/USD was again unable to break above the 1.7150 resistance area and dipped to test support below 1.7100 in early US trading as profit-taking pressure intensified.