FX Market Summary 07-15-2014: Dollar Gains After Mixed Yellen

Volatility finally increased on Tuesday as fundamentals had a greater market influence with Sterling the stand-out performer as the dollar also gained ground after Yellen’s testimony.

As expected, the Bank of Japan held policy steady at the latest policy meeting. There was a slight downgrading of the growth forecasts which had some impact in curbing yen support as underlying confidence in the fundamentals remained fragile. USD/JPY edged to the 101.60 area with a stronger set of Chinese money supply and lending data also helping to underpin risk conditions.

Sterling profit taking was the dominant influence in early Europe on Tuesday with GBP/USD dipping lower to test key support in the 1.7050/60 area. There was a savage reversal following the latest economic data releases with the headline annual inflation rate rising much more strongly than expected to 1.9% from 1.5% and compared with a consensus of 1.6%.

The jump was due to an important extent by lower seasonal discounting and could be reversed next month, but the data still triggered a big spike in Sterling as GBP/USD jumped higher to test resistance around 1.7150. EUR/GBP also declined sharply to near 0.7920 from 0.7970.

The German ZEW index was again weaker than expected at 27.1 for July from 29.8 previously. This was the sixth consecutive month where the outcome has been weaker than expected while it was the lowest reading for 18 months.

Headline US retail sales was weaker than expected with an increase of 0.2% for June. There was an upward revision to May’s data and the underlying data was solid which maintained underlying dollar support with confidence boosted by a strong reading for the New York Empire index. Market moves were also limited as traders waited for testimony from Fed Chair Yellen.

The Fed Chief maintained a slightly more optimistic tone surrounding the US economy, but also included her familiar caveats in the prepared testimony. The recovery was again described as not complete and that a high degree of monetary accommodation was still required. There was still slack in the labour market and earnings growth has been slow. There were also comments that interest rates could be increased sooner and faster if the labour market continues to improve.

The dollar dipped weaker in immediate response before regaining ground as the markets took stock of some of the less dovish aspects. EUR/USD dipped to test support below 1.3580 as USD/CHF rallied to the 0.8950 area. USD/JPY found support below 101.50 while GBP/USD retreated back towards 1.7150 after briefly pushing above 1.7180.

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