Trading ranges were generally narrow during much of Friday with an important element of caution as liquidity levels remained low. Equity markets had a firmer tone and emerging markets attempted to stabilise after a week of substantial losses.
There was no retreat in Euro-zone bond yields for the major markets as benchmark 10-year German yields approached the 2.0% level for the first time in over two years while US yields moved lower later in the US session. The yen again suffered from a lack of yield support as USD/JPY tested resistance above the 99 level for the first time in three weeks.
Federal Reserve regional President Lockhart stated that he would be comfortable with a move to taper bond purchases in September provided that the economic data maintained its current trajectory. The comments are potentially important given that Lockhart is generally seen as a moderate voice on the FOMC and broadly aligned with Bernanke’s view. Fellow President Bullard, who adopts a more dovish tone, was generally more cautious as he stated that the Fed should be in no hurry to taper bond purchases as inflation has been low and GDP growth weak.
EUR/USD edged lower at times, but was not subjected to fresh attack ahead of the US open. The US new home sales data was sharply weaker than expected with a decline to an annualised rate of 394,000 from a downwardly-revised 455,000 previously as the inventory of unsold homes also increased. The data did raise some concerns that housing-sector momentum could stall and the dollar moved weaker.
There were further comments from Bullard that any increase in interest rates should be resisted. There was still evidence of long retail positioning and a reduction in these positions ahead of the weekend triggered more volatile price action during the New York session. EUR/USD spiked to the 1.34 area as USD/JPY was unable to hold the 99 level.
The headline UK data was better than expected with second-quarter GDP revised up to 0.7% from the preliminary 0.6% estimate and there was also a positive contribution from exports which increased optimism surrounding a potential rebalancing of the economy.
Sterling spiked higher on the release as GBP/USD moved back above the 1.56 level. The other UK data was less impressive with a slowdown in services-sector growth for June while there was also a significant weaker than expected release for mortgage approvals, contrary to recent strong housing-sector data. Sterling failed to hold the gains as GBP/USD dipped back to the important 1.5550 support area and EUR/GBP moved closer to 0.86.