EUR/USD After being subjected to significant selling in early Europe on Tuesday, the Euro was unable to regain significant ground and retreated to fresh seven-month lows while the dollar overall pushed to eight-month highs. There was an improvement in the German ZEW business confidence index to 10.4 for November from 1.9 previously as expectations of further monetary easing helped underpin sentiment. There was little market reaction with markets focussed on yield divergence and strong expectations that the ECB would cut the deposit rate at December’s meeting. There were further concerns over the longer-term impact of the weekend attacks on Paris with French budget targets under threat and potential economic damage which would hurt Euro sentiment. US inflation data was in line with expectations as both the headline and core indices registered a 0.2% monthly gain while the annual core rate was unchanged at 1.9%. The lack of downward surprises in the data and underlying creep higher in core elements maintained expectations that Federal Reserve would move ahead with a December rate increase. Elsewhere, headline industrial production was weaker than expected, but manufacturing beat expectations while capacity use was in line with the consensus forecast. The NAHB housing index dipped to 62 for November from 65 previously while mortgage delinquencies declined further for the third quarter. Unable to regain the 1.0700 area, the Euro dipped to fresh daily lows below 1.0640 before stabilising at lower levels with little change during the Asian session on Wednesday. The Fed minutes from October will be watched closely for further evidence on December intentions, although the meeting came before November’s strong employment data.
JPY The dollar maintained a firm tone against the yen on Tuesday and pushed to highs just below the 123.50 level, although ranges were relatively narrow. After four days of declines, there was a recovery in US bond yields which helped underpin the dollar to some extent while there was no further setback to risk appetite which curbed defensive yen demand. There were still concerns surrounding the global growth outlook potentially stifling capital outflows from Japan. There were further concerns surrounding capital flows from emerging markets, especially if the Fed tightens in December. In these circumstances, risk conditions could deteriorate which would tend to underpin the yen, although valuation pressures would tend to weaken the currency. The dollar was again blocked in the 123.50 area in Asia on Wednesday on fragile risk.
GBP Headline UK inflation was in line with expectations as prices fell 0.1% in the year to October, the first consecutive negative readings since the current series was introduced. Core inflation edged slightly higher to 1.1% from 1.0% previously and the lack of any downward surprise in the main indices provided some net Sterling support, although the impact was measured. There were further expectations that the ECB would run a looser policy than the Bank of England which pushed the Euro weaker and Sterling gained fresh support following a break of Euro support at 0.7000. In this context, Sterling was resilient against the dollar and pushed to highs just below 1.5240 before retreating back to the 1.5200 area. There will still be concerns over fiscal tightening in 2016 which will make it more difficult for the Bank of England to tighten policy with re-negotiation of EU terms also a significant underlying factor.
CHF The Euro was resilient against the Swiss currency on Tuesday with a move back above the 1.0800 level despite wider vulnerability. With the Swiss currency generally weaker, the dollar pushed to 10month highs around 1.0170 during the US session. There was no fresh deterioration in risk conditions which curbed potential franc demand while expectations of a Fed tightening highlighted the negative Swiss yield structure. There is still likely to be caution surrounding security concerns within Europe which could lead to fresh franc demand and volatile market conditions.