FX Market Summary 09-26-2013: Euro unsettled but still resilient

The yen initially held steady in Asia on Thursday before weakening sharply with USD/JPY peaking above 99.0. There were further expectations that the government would announce a cut in corporate taxes next week as part of a wider fiscal package and speculation that major pension funds would announce an increase in asset allocations overseas. Later in the European session, the Finance Ministry downplayed expectations of a tax cut which temporarily pushed USD/JPY lower before fresh gains in New York.

EUR/USD hit resistance on moves towards 1.3530 while there was initial buying support below 1.35 as uncertainty persisted with the pair also shackled by reports of a large 1.3500 option expiry at the new York cut. There was another weak reading for Euro-zone money supply and lending which reinforced pressure on the ECB not to allow any stealth policy tightening.

Politically, there were fresh tensions surrounding Italy as centre-right backers of former Prime Minister Berlusconi again threatened to trigger a government collapse. The Italian President cancelled his engagements in order to focus on the crisis which unsettled bond markets. Italian benchmark yields rose by over 10 basis points on the day and there was a negative Euro impact.

The US jobless claims data was slightly better than expected at 305,000 in the latest week from a revised 310,000 while Q2 GDP was unrevised at 2.5% and pending home sales were weaker than expected with a 1.6% monthly decline. The dollar gained some fresh support from comments by Fed Governor Stein who stated that he would have been comfortable with a September tapering, but the US currency was still finding it very difficult to gain any traction as EUR/USD settled just below the 1.35 level.

The headline final UK GDP reading for the second quarter was in line with expectations at 0.7%. There was some disappointment over a weaker than expected annual growth rate, although this primarily reflected a higher base after 2012 data was revised higher.

There was a wider than expected current account deficit of £13.0bn from a consensus forecast of £11.0bn and the first-quarter shortfall was revised sharply higher to £21.8bn. A current account deficit on this scale does expose a currency to substantial losses if there is any withdrawal of overseas support. With investment also revised down for the quarter, there was a negative Sterling reaction as GBP/USD dipped below 1.6050. The currency was unable to secure a recovery later in the session and EUR/GBP was able to rally to above 0.84.

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