The Euro broke higher against the dollar in New York on Monday on speculation over a more dovish Fed tone and a key feature again on Tuesday was strong buying support on any significant dips. Choppy market conditions was also a key feature with a reluctance to hold aggressive positions ahead of key event risk. There were reports of institutional Euro demand while shorter-term players looked to trigger Euro buy stops on the upside.
The German ZEW business confidence index was marginally stronger than expected with an increase to 38.5 for June from 36.4 the previous month although there was a disappointing reading for current conditions. Markets looked for the data to trigger a break above important resistance in the 1.34 area, but EUR/USD was unable to push through and corrected significantly weaker.
The US housing data was slightly weaker than expected with the recovery in starts falling short of expectations while permits held below the annualised 1.0mn level. The longer-term data trend was still favourable with starts at close to five-year highs.
Equity markets were determined to take an optimistic tone during the day with US and European bourses moving higher. This was important in underpinning risk appetite which also curbed immediate demand for defensive assets. USD/JPY pushed to highs above 95.70 as yen demand faded while the Euro moved above the 128 level late in European trading as it also made a fresh attempt at breaking above 1.34 against the dollar.
There was still a high degree of uncertainty surrounding Wednesday’s Federal Reserve meeting, especially with no real consensus over the central bank’s stance with markets extremely anxious over the outlook for a potential tapering of bond purchases.
Sterling was still being undermined by disappointment following the inability to break above key technical resistance in the 1.5750-80 band on Monday. GBP/USD was unable to mount a significant challenge on resistance levels above 1.57 early in the European session and initially dipped towards 1.5650.
The latest UK consumer inflation data was higher than expected with an increase in the annual rate to 2.7% for May from 2.4% previously. The higher than expected release did little to bolster Sterling with the currency undermined by fears that rising prices would undermine consumer purchasing power. Sterling dipped to lows below 1.56 before a slight recovery and also slipped towards May lows beyond 0.8580 against the Euro.
The Australian dollar remained an important focus following generally dovish Reserve Bank minutes. Although the US dollar was generally on the defensive, AUD/USD retreated to lows below 0.9450 during the European session. Weakness in precious metals had a negative impact on the Canadian dollar as USD/CAD broke above 1.02.