The dollar initially gained support on Tuesday from a slightly less dovish that expected Federal Reserve statement which kept alive at least some possibility of a tapering move in December with officials were less concerned over underlying economic trends. EUR/USD retreated to the 1.37 area with the currency still susceptible to profit taking after hitting tough resistance above 1.38.
As expected, the Bank of Japan left policy on hold at the latest policy meeting. The yen was broadly resilient during the Asian session with USD/JPY dipping lower in tandem with a slide in the Nikkei index, although there was support above the 98 level.
There was a high level of market activity during the European session with the Euro subjected to renewed selling pressure. The fresh round of damage was sparked by significantly weaker than expected economic data as well as official comments. Discomfort started with the Italian unemployment release with the headline rate rising to 12.5% from a revised 12.4% previously with youth unemployment moving above 40%.
For the Euro-zone as a whole, there was an unemployment rate at 12.2% compared with the 12.0% expected. In addition, there was a sharp decline in the flash inflation rate to 0.7% from 1.1% previously. This combination of data increased pressure on the ECB to take more aggressive policy action to support economies and ease any underlying deflation threat. The market was also unsettled by comments from ECB member Nowotny who suggested that a further LTRO would be considered.
The Euro was subjected to heavy selling pressure on the crosses and EUR/USD retreated to test support below the 1.3650 level for the first time in two weeks while EUR/JPY dipped below the 134 level.
After gaining some respite in US trading, there was a fresh round of selling later in the session. The jobless claims data was slightly better than expected at 340,000 from 350,000 previously, but the next round of Euro selling was triggered primarily by a much stronger than expected Chicago PMI release. There was a strong headline figure of 65.9 for October from 55.7 previously as the orders component surged. In response, there was a fresh EUR/USD slide to the 1.3610 area as short-term longs bailed out of positions.
The UK economic data did not have a significant impact with consumer confidence little changed for the month. Technical considerations were important with GBP/USD gaining support after finding firm bidding support in the 1.60 area. EUR/GBP was also a very big mover on the day with a slide to below 0.85