FX Market Summary 06-27-2013: Fed officials can’t talk dollar down

Although EUR/USD was able to find support below 1.3000 in Europe on Thursday, upward progress remained very limited and laboured as it was capped around 1.3040, remaining well-adrift of levels seen before the Federal Reserve meeting. USD/JPY traded with a firm tone as it tested the 98.50 area.

A better than expected German unemployment reading with the first decline in four months and an easing of the Euro-zone retail sales decline failed to trigger any significant Euro buying support.  Money supply growth was weak and there were further expectations that the ECB would be forced to take a dovish stance at next week’s policy meeting, especially with the OMT programme facing major difficulties.

The US jobless claims data was slightly better than expected with a drop to 346,000 in the latest reporting week from 355,000 previously while the pending home sales was much better than expected with a 6.7% monthly gain. The data helped sustain underlying confidence in the US economy and currency.

The dollar was engaged in a tussle between positive sentiment and the potential impact of Fed officials who again looked to talk-down the prospect of any near-term policy tightening. Governor Dudley stated that the Fed was nowhere near raising interest rates while the recent market reaction was out of sync both with Fed statements and expectations of the FOMC. Fellow Governor Powell chimed in with comments that market anticipation of a 2014 rate increase was out of line with the Fed view.

Fed rhetoric did have some impact in curtailing bond-market losses and EUR/USD again attempted to pull away from the 1.3000 support zone.  There was caution over extending short Euro positions given the uncertainty of month-end and quarter-end position adjustment over the next 24 hours, but rallies quickly attracted selling pressure with the dollar gaining fresh support.

The final first-quarter UK GDP data was in line with expectations at 0.3%. The revisions did, however, spark significant market interest with weaker than expected annual  growth.  Adjustments to historic data meant that there had no longer been a double-dip recession early in 2012, but the overall recession was revised deeper. There was also a sharp decline in disposable income for the first quarter which will undercut spending power.

The current account remained firmly in deficit, a reminder of the precarious balance of payments position, and there was a fresh downward pressure on Sterling with GBP/USD sliding below 1.53. A half-hearted recovery failed to overcome the former resistance area and there was a renewed decline to near 1.52 in US trading, the weakest level since early June.

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