Watchfulness was the general theme during Tuesday ahead of the long-awaited Federal Reserve statement and Chairman Bernanke’s press conference on Wednesday. Given the wide number of potential options surrounding tapering and forward guidance, there was a reluctance to maintain aggressive positioning with moves unable to attract any significant momentum. The dollar overall was also unable to gain any significant traction, still unsettled by negotiations surrounding the next Fed Chairman.
The German ZEW data was stronger than expected with the first above-consensus reading for five months with an increase to a three-year high of 49.6 from 42.0 previously. The overall impact was limited given the recent run of firm German data. There were still underlying concerns surrounding the Euro-zone outlook as a whole and ECB member Praet emphasised that money supply growth was weak with a sharp lending decline in Spain and Italy. There will still be pressure on the ECB to ensure that monetary conditions don’t tighten and this did impede the Euro.
The headline US consumer prices data was weaker than expected at 0.1% while the core increase was in line with expectations, also at 0.1%. The subdued data will reinforce expectations that the Fed will able to keep a very loose monetary policy given the absence of inflationary pressure.
The latest US capital flows data registered long-term inflows of US$31.1bn for July compared with outflows of US$67bn the previous month. This provided some degree of reassurance over net flows and helped underpin the dollar against the yen with USD/JPY rising to a high above 99.30 during the New York session. EUR/USD was trapped in narrow ranges with support below 1.3330 and no move on resistance above 1.3380.
The latest UK housing data maintained a firm tone, led by gains in London while the regional picture was mixed. The headline UK inflation data was in line with expectations with a decline in the annual inflation rate to 2.7% for September from 2.8%. There was, however, an increase in the RPI rate to 3.3% from 3.1% which will reinforce concerns that consumer spending will remain under pressure over the medium term.
In this context, there were some concerns that the economic recovery was losing momentum which would also make it more difficult for Sterling to make ground. GBP/USD did find some support below 1.59 with EUR/GBP also hitting resistance around 0.8410.