FX Market Summary 12-11-2013: Volatility Spikes Higher

US congressional negotiators reached a deal on a two-year budget deal which, assuming it is passed by both houses of Congress, would avert the threat of a fresh government shutdown in January. This would also make it easier for the Fed to taper bond purchases which should, in theory, underpin the dollar.

The US currency was initially able to resist further losses and consolidated with a slightly firmer tone early in the European session on Wednesday. As has been the case persistently over the past week, however, the dollar was unable to make strong headway with EUR/USD again holding above initial significant support levels and refusing to yield ground.

ECB officials remained cautious over the prospect of any shift to a more aggressive monetary stance and overall conditions are still tightening relative to the US. In this environment, the Euro continued to trade above estimates of fair value.

The Swiss franc again maintained a strong tone ahead of tomorrow’s quarterly National Bank policy meeting. With speculation over an upgrade to growth and inflation forecasts, as well as expectations that additional action would be required to cool the housing sector, the currency held firm. EUR/CHF was unable to move away significantly from the 1.22 level while USD/CHF again tested support near 0.8850.

After a generally sedate session, volatility spiked higher in New York. EUR/USD initially moved to fresh six-week highs with speculative players looking to trigger stop-loss Euro buying and take out option-barrier interest at the 1.38 area. An initial attempt failed and after a second push higher was also repelled, EUR/USD dipped sharply back to the 1.3770 area before another charge higher to attack the 1.3800 area once again.

There was also a significant deterioration in risk appetite as equity markets were subjected to selling pressure. AUD/USD came under fresh attack with an initial loss of 0.9100 support helping to drive the pair sharply lower to the 0.9050 area while USD/CAD regained 1.06.

Sterling has had a less convincing tone over the past 24 hours with a growing suspicion that all potential good news has been priced in. GBP/USD’s inability to hold 1.6450 triggered a correction with lows just below 1.6350 while EUR/GBP also rallied strongly from recent weakness to around 0.8420.

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