FX Market Summary 08-29-2013: Defensive plays lose support

There was a recovery in key emerging-market currencies such as the rupee on Thursday with the Indian Reserve Bank announcing fresh measures to help support the currency with a direct auction of dollars to oil companies. With tensions also easing slightly throughout Asia and expectations of a potential delay in any military strike on Syria, there was a reduction in demand for the yen and Swiss franc. USD/JPY was able to move to the 98.50 area while USD/CHF pushed to highs above 0.93.

There was a surprise 7,000 increase in German unemployment for August, offsetting the decline seen for the previous month, but the overall impact was limited with attention focussed elsewhere. Underlying stresses within peripheral Euro-zone economies remained lower which helped protect the Euro as Italy held a broadly successful bond auction.

The dollar did gain wider support from the advance against the yen and Swiss franc.  Yield considerations were also significant as the gap on US Treasuries over German bunds has moved wider during the past 24 hours. The Euro dipped lower early in the European session and technical considerations were important as a break of 1.3300 in EUR/USD had a crucial impact in triggering stop-loss Euro selling as the pair dipped to lows near 1.3250.

The US GDP data was stronger than expected with the second-quarter estimate revised up to 2.5% from 1.7% previously and compared with expectations of a 2.2% rate.  As expected, exports were revised higher and there was also a positive impact from rising inventories. Initial jobless claims were close to expectations with a decline to 331,000 in the latest week from 337,000 previously.

The net impact was to boost confidence in the US economy overall and also maintained expectations that the Federal Reserve would push ahead with bond-purchase tapering at the September meeting. This helped underpin the US currency as EUR/USD tested support below 1.3250 with short-term players looking to test the important 1.32 area.

There was no repeat of the Sterling fireworks seen on Wednesday with a lack of data or central bank speeches. Underlying confidence in the UK economy remained firmer and there was further speculation that the Bank of England would not be able to combat higher bond yields. In this environment, Sterling advanced to beyond 0.8550 against the Euro and GBP/USD managed to hold near 1.55 despite wider US strength.

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