FX Market Summary 08-01-2013: Knockout blow missing for dollar and Euro

The dollar was subjected to renewed selling pressure following the Federal Reserve statement on Wednesday. The overall tone was mildly dovish despite some optimism over the economy and labour markets with some concerns over low inflation risks. In particular, there was no reference to a potential tapering of bond purchases, either in September or any other time frame. This lack of comment unsettled markets and triggered further doubts whether tapering would take place in September. The dollar retreated with EUR/USD highs around 1.3340 before consolidation near 1.33.

The yen weakened during Asian trading on Thursday with a fourth consecutive week of capital outflows from Japan having a negative impact. An improvement in risk appetite following the Fed also curbed yen demand as USD/JPY pushed back above 98.

The latest UK data was again significantly stronger than expected with the PMI manufacturing index rising to the highest level since the second quarter of 2011 with a reading of 54.6 from 52.9 previously. GBP/USD recovered strongly from lows below 1.5150 to trade back above 1.52 in very choppy conditions.

There were no surprise from the Bank of England as interest rates were left on hold at 0.50% and quantitative easing was also left on hold at £375bn. The MPC confirmed that it would publish guidelines on forward guidance alongside the latest inflation report due next Wednesday. The absence of any fresh measures helped maintain a firm GBP/USD tone and EUR/GBP dipped back below 0.87 before seling emerged again in New York.

The Euro-zone data did not have a significant impact with the PMI manufacturing index confirmed at above 50 for the first time in two years as markets waited for the ECB decision.

The central bank announced no changes at the latest council meeting with the repo rate left at 0.50%, maintaining the focus on President Draghi’s press conference. The comments were broadly in line with last month’s meeting with confidence showing some recovery from very low levels. The bank remained committed to forward guidance without adopting any specific numerical thresholds. Draghi did comment that the rise in money-market rates was not justified and EUR/USD briefly dipped to below the 1.32 level before regaining ground as sellers again failed to take control.

The US jobless claims data was better than expected with a decline to 329,000 in the latest week from a revised 345,000 previously which suggested a solid labour market ahead of Friday’s pivotal payroll release and the ISM non-manufacturing release was also strong. The dollar retraced gains against the Euro, but the data helped maintain a robust tone against the yen as USD/JPY rose to a high above 99.20.

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