FX Market Summary 07-17-2013: Bank of England shift boosts Sterling

EUR/USD was in consolidation mode during European trading on Wednesday with market waiting for congressional testimony from Fed Chairman Bernanke and, after pushing to highs around 1.3170 yesterday, EUR/USD held near 1.3140.

Sterling was again a big mover during the European session. The latest labour-market data was generally better than expected with a 21,200 decline in the latest unemployment claimant count following a revised decline of over 16,000 the previous month and this was the sharpest rate of decline for three years. There was also a recovery in annual earnings growth to 1.7% from 1.3% which will help ease the squeeze on real incomes.

The Bank of England minutes were the main focus of attention and there was a surprise with the quantitative easing vote  at 9-0 for unchanged bond purchases for the first time since October 2012. Miles and Fisher, the two remaining members who voted for further quantitative easing last time, switched to vote for an unchanged policy. This reflected the fact that the bank will look at alternative measures to underpin the economy and keep bond rates down. Although the initial interpretation may be revised, markets took the minutes to be more hawkish and GBP/USD pushed to highs around 1.5250 while Sterling also recovered ground against the Euro.

The latest US housing data was weaker than expected with a decline in starts to an annualised rate of 0.84mn for June from 0.93mn previously while permits also declined which may have some impact in cooling optimism towards the construction sector.

There were fresh concerns surrounding rising Portuguese bond yields, with the risk that a second bailout package will be needed, and reports of a further deficit financing gap within Greece. On another day, the impact might have been more significant in undermining the Euro, but the main focus was on Fed Chairman Bernanke’s testimony.

In his prepared remarks, he maintained a broadly consistent tone with comments that the programme of asset purchases will start to be wound down later this year and completed during 2014 if the economy performs as expected. There were again important caveats that quantitative easing could be maintained or even extended if the economic conditions deteriorate. The Fed will also look to keep interest rates at extremely low levels, at least until unemployment falls below 6.5%.

EUR/USD briefly spiked to the 1.3170 area before moving lower again as there was renewed selling interest at higher levels which pushed the rate lower. As stop-loss selling also kicked in at lower levels, EUR/USD dipped to lows below 1.31 as Bernanke fielded questions from the House. USD/JPY moved back to the 99.85 area while GBP/USD retreated back to below 1.52.

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