FX Market Summary 12-20-12: Profit Taking Hits Dollar

As expected, the Bank of Japan held policy unchanged at the latest policy meeting. There were still expectations that the central bank would inject further additional stimulus during 2014 to help offset a planned sales-tax increase. USD/JPY pushed higher to above 104.50 for the first time since October 2008 with short-term players looking to target the key 105 level. The pair was then subjected to a limited correction amid reluctance to commit additional shorts.

There were mixed readings for the latest batch of UK data releases. Although third-quarter GDP was unrevised at 0.8%, there were upward revisions to data for the previous two quarters and annual growth was estimated at 1.9% from 1.5% previously.

Any positive Sterling implications were undermined by a much weaker than expected quarterly current account deficit of over GBP20bn which was also above 5.0% of GDP. Although the negative impact was offset to some extent by a downward revision for the second quarter, the data increased fears surrounding an unbalanced recovery and risk of balance of payments crisis. The latest borrowing data was also weaker than expected which prevented any traction for Sterling and GBP/USD dipped to test support below 1.6320.

EUR/USD was trapped in relatively narrow ranges ahead of the New York open, bolstered by the ability to hold 1.3625, but unable to challenge any significant resistance levels.

The US GDP data was stronger than expected with a final reading of 4.1% from 3.6% previously which gave another boost to US economic confidence following slightly disappointing releases on Thursday. EUR/USD dipped lower following the US releases, but bears were again unable to take out support levels which forced a covering of short positions.

Position adjustment had a significant impact and there was some dollar selling into the latest option expiries in New York with falling liquidity tending to exaggerate currency moves.

There was dip lower in US bond yields later in the New York session with notable profit taking following the increase in yields this week. This did have a significant impact in curbing dollar support as EUR/USD rallied back to the 1.3700 area. USD/JPY also dipped sharply to the 104.15 area as aggressive profit taking kicked in.

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