The dollar came under sharp selling pressure late in US trading on Wednesday following the early release of Fed Vice-Chairman Yellen’s prepared testimony to the Senate banking committee. References to the economy and labour market being far short of their potential triggered expectations of a very dovish monetary policy which undermined the US currency.
EUR/USD pushed to a high close to the important 1.35 technical area before edging lower again. USD/JPY proved resilient at lower levels with support on approach to 99.10 and moved higher in Asian trading Thursday. Although the latest GDP estimate was slightly weaker than expected, there were robust gains for the Nikkei index which tended to weaken the yen. USD/JPY moved to challenge resistance levels above the 100 level for the first time in over 2 months.
The latest Euro-zone GDP data was slightly disappointing with both the French and Italian economies registering a 0.1% contraction for the third quarter and this held overall euro-zone growth to 0.1% from 0.3% previously. The data increased fears that growth would fade very quickly and could re-enter recession as underlying structural vulnerabilities re-assert themselves.
EUR/USD retreated to the 1.3420 area, but sellers were still having difficulties making any sustained impression on support levels and the pair quickly recovered ground into the US open. The US data releases did not have a major impact with jobless claims slightly higher than expected at 339,000 in the latest week from 341,000 previously while the trade deficit was slightly wider than expected at US$41.8bn for September.
Yellen’s subsequent testimony was close to expectations with a commitment to keeping quantitative easing in place to support the economy and that monetary policy would remain highly accommodative for some time after winding down QE. There was a warning not to keep the programme in place for too long with the need to withdraw stimulus in a timely manner. EUR/USD was able to consolidate above 1.3450 with no sign of significant hawkishness from Yellen.
In contrast to Wednesday, the latest UK economic data was weaker than expected as retail sales dropped 0.7% for October following a 0.6% gain the previous month. Markets were focussed more on the on-going interest rate debate following the Bank of England’s inflation report and this continued to provide underlying Sterling support with some speculation that rates could be increased next year. GBP/USD found initial support just below 1.6000 and rallied to a peak at 1.6090.