Volatility was again a notable feature in Asia as USD/JPY dipped sharply to lows around 94.50 from highs around 95.80. There was a palpable sense of fatigue in markets following wild moves seen during the week as a whole, but erratic moves continued. Tension was also an important factor ahead of a series of key events next week with the Federal Reserve statement on Wednesday a key focus.
Trading was relatively featureless ahead of the US open with the Euro tending to drift lower. There was a first-quarter Euro-zone employment decline of 0.5%, reinforcing the very weak labour markets and also reminding markets that there are still extremely serious economic vulnerabilities within the area. Any Euro appreciation will exacerbate the loss of competitiveness for peripheral economies and there will be increased pressure for more decisive ECB monetary action.
Deputy Bank of England Governor Tucker announced that he would be leaving the bank later this year and there will, therefore, be a new Governor and Deputy Governor during the second half of 2013. The resignation reinforced expectations of a new-style regime and heightened uncertainty surrounding monetary policy. The immediate implications were limited, especially as an improvement in economic data has dampened expectations of further quantitative easing. Sterling has proved resilient throughout this week and GBP/USD again found strong buying support on dips towards 1.56 with a move to 1.5685 late in Europe.
The US data releases did not have a decisive market impact given that there was little impact on policy expectations, although there was a softer underlying tone which did little to support the US dollar. Industrial production was unchanged for May and capacity use edged lower which were both below market expectations. There was also a decline in the latest University of Michigan consumer confidence index to 82.7 for June from 84.5 previously which suggested that consumer optimism may be peaking.
In the absence of any official comments, markets continued to trade-off media comments. The dollar was still under some pressure from Wall Street analyst Hilsenrath’s comments late on Thursday which suggested that Fed was looking to push back against market expectations of higher interest rates.
Position adjustment again had an important impact during US trading. A notable feature of recent sessions has been a dollar sell-off in late European trade, usually after the 10.00 Eastern Time option expiries. Friday’s market was no exception as EUR/USD rallied to the 1.3340 area from a low just below 1.33. USD/JPY again lost a foothold above the 95 level and retreated sharply to lows below 94.50 as cable pushed to daily highs.