FX Market Summary 09-16-2013: Summers withdrawal hurts the dollar

The main event, which broke on Sunday just before markets opened, was the decision of Summers to withdraw as a candidate to be Fed Chairman. There had been increasing opposition from Senate Democrats with at least three senior committee members pledging to oppose his nomination. If appointed, markets were expecting Summers to withdraw quantitative easing at a faster pace than rival candidates. His withdrawal from the race, therefore, undermined the dollar sharply on expectations that the Fed will now pursue a more dovish policy, especially if Vice-Chairman Yellen is nominated. In response, there was a sharp decline in US Treasury yields which hurt the dollar.

There was also a wider loss of confidence in the Administration and Fed as a whole with another significant setback for President Obama. In this environment, EUR/USD gapped sharply higher to a peak in the 1.3380 area while USD/CHF tested support below 0.9250.

According to the latest weekly CFTC data, there was another increase in long speculative dollar positions to a six-week high which will make it difficult for the dollar to make significant headway overall, but there was still a net long Euro position which should provide some underlying resistance for the EUR/USD pair.

The US data releases on Monday did not have a major impact with the New York Empire index edging lower to 6.3 from 8.2 previously while the increase in industrial production was in line with expectations at 0.4%. The data did not have any effect on interest rate expectations with the crucial Federal Reserve FOMC meeting due to start on Tuesday with a tapering decision due on Wednesday.

ECB President Draghi continued to warn that the Euro-zone economic recovery was fragile and that interest rates would remain at current rates or even lower over the next 12 months at least. The comments did not have any significant market influence and there were no Euro-zone data releases of note on the docket. Market remained tense ahead of the German Federal election due this weekend, especially with opinion polls still suggesting the risk of a Grand Coalition if no majority can be formed.

EUR/USD consolidated around 1.3360 with no fresh incentives while USD/JPY found support below 98.50 as risk appetite improved. Sterling continued to benefit from a covering of exposed short positions. Following the spike higher in Asian trading, GBP/USD consolidated at fresh 8-month highs above 1.59 as EUR/GBP held below 0.84.

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