FX Market Summary 11-12-2013: Inflation drop hurts Sterling

There was a significant decline in Australian business confidence according to the latest reading on Tuesday which put the Australian dollar on the defensive as AUD/USD retreated to test support levels near 0.9300.

There was a weaker than expected reading for German wholesale inflation which reinforced speculation that the Euro-zone could head towards a spell of deflation.  ECB member Asmussen stated that the central bank had not run out of options on monetary policy and that there was scope for further cuts in interest rates dependent on inflation conditions. There appeared to be a determined effort by council members to show unity, at least for now, but underlying speculation over internal divisions continued given the economic divergence.

The comments from Asmussen triggered selling pressure on EUR/USD which retreated to lows around 1.3360 during the European session. Bears were unable to push the pair below 1.3350 which encouraged a round of short covering and the Euro also gained some support on the main crosses.

There was further speculation that the Federal Reserve could move towards a limited tapering of bond purchases at the December meeting and US Treasury bond yields pushed to the highest level for eight weeks. The Euro was resilient despite the dollar’s increased yield support and expectations of divergent monetary-policy trends with EUR/USD pushing to highs just above 1.3450 during the New York session. USD/JPY held a firm tone on yield grounds without being able to make a challenge on tough resistance in the 100 area.

The latest UK RICS house-price survey pushed to the highest level for 11 years which initially underpinned Sterling. The latest UK inflation data was sharply weaker than expected with the headline CPI rate falling to 2.2% in October from 2.7% previously and compared with expectations of a 2.5% rate. There was also a decline in the core rate to below 2.0%. The data pared expectations that the Bank of England might have to tighten monetary policy and pushed Sterling sharply lower.

GBP/USD had already been on the defensive ahead of the release and a dip below the 1.5900 support area pushed the pair to lows near 1.5850 as EUR/GBP moved to highs above 0.8450. Wider dollar vulnerability helped push the UK currency back above the 1.59 level.

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