Talking FX Daily Wrap: July 15, 2014

EUR/USD

Despite after-market comments from Draghi yesterday saying the ECB is intensifying preparations for an ABS program and the council is unanimous in using unconventional measures as QE is within the ECB mandate, the pair started the session off in a relatively rangebound manner. However, the pair was led lower alongside the fall in EUR/GBP, which the saw the cross move below its 2014 low of 0.7915 following the higher than expected UK CPI reading. Further downside for the pair was then exacerbated by the German ZEW Survey, with the headline expectations reading coming in at 27.1 (Exp. 28.2) which consequently saw the pair breach below the key 1.3600 handle. This pair then traded in a rangebound manner alongside the North American crossover with attention turning to Fed Yellen’s testimony. At the Testimony, despite comments from the Fed Chair saying QE is likely to end in October and a rate hike could occur sooner, she highlighted that significant slack remains in labour markets and thus saw broad-based weakness across FX markets. The hawkish FFR comments proceeded to send the pair lower and add to the downside momentum provided by earlier ZEW and EUR/GBP inspired losses. Looking ahead, tomorrow sees an absence of tier 1 data from the Eurozone, although ECB’s Coeure is due on the speaker slate.

GBP/USD

In the first half of European trade, all eyes were on the UK CPI data, with the overnight UK BRC like-for-like sales falling 0.8% vs. an expected 1.0% rise. The UK CPI data far exceed expectations of 1.6% by coming in at 1.9%, this saw an immediate fast-money move higher of around 60 pips as the pair moved above the 1.7100 handle, with participants continuing to bring forward their expectations of a rate hike by the BoE. Following the release, attention turned to BoE Governor Carney’s questioning by UK lawmakers, although the central banker failed to present the pair with any further price action, saying that his comments about an early rate rise were intended to make markets more aware of risks and not indicate the path of BoE policy. As was the case across most major FX pairs, GBP gained at the expense of a weaker post-Yellen USD, which consequently led the pair just short of the 1.7200 handle to print its highest level since October 2008. Looking ahead, tomorrow’s main source of focus from the UK will be the May jobs report, with the headline Unemployment figure expected to fall to 6.5% from 6.6%

USD/JPY

Overnight, the key event for the pair came in the form of the BoJ rate decision, however the central bank kept their monetary policy on hold while revising down their 2014 GDP forecast. This was in line with expectations and thus failed to counter JPY weakness stemming from the move higher in the Nikkei 225. The pair then proceeded to trade in a relatively rangebound manner around the 101.50 level for the majority of European session until Fed Yellen’s testimony. The initial comments from the Fed Chair were interpreted as particularly dovish with Yellen saying there remains significant slack within the economy and thus saw the pair spike lower to intra-day lows. HoHowever, this move was subsequently reversed with the pair then moving into positive territory as participants attention shifted on to hawkish comments that the FFR target would likely occur sooner and be more rapid than currently envisioned if the labour market continues to improve more quickly than anticipated by the FOMC. Looking ahead, the key source of focus for the pair overnight will be the Chinese GDP release, with the Y/Y figure expected to remain unchanged at 7.4%. Attention will then turn to comments from Fed’s Yellen and Fisher as well as the US PPI and industrial production data.