FX News And Analysis

The dollar traded mixed on Wednesday, rising against the pound, which fell on fresh QE fears while falling to the euro and yen. The euro rose strongly versus the dollar putting an end to the recent sharp sell-off as sentiment stabilized following the swearing in of an interim government in Greece. The probability of Greece exiting the euro-zone also lessened as a majority of Greek people said they want to stay. On the data front, Housing Starts (Apr) showed a rise of 18k to 717k when a fall had been expected; Building Permits, however, fell by 54k, which was more than the 39k drop expected. Industrial Production showed a positive 1.1% rise and Capital Utilization also rose higher than expected; Manufacturing Production rose by 0.6% when the previous month of March had seen a 0.4% fall and Mortgage Foreclosures and Delinquencies remained, more or less, unchanged. All the data taken together continued to support a slow recovery, which has characterized the U.S. economy over the last year. It now remains for the Fed's April meeting minutes to back up the reasonably robust data for the greenback to strengthen further.

EUR
The euro traded volatile on Wednesday, rising at the start of the European session after sentiment stabilized following the swearing in of a caretaker government in Greece, which will be in power until new elections on June 17th. Markets may also have steadied as participants reflected that it was by no means a certainty that Greece will depart the euro-zone or that the anti-austerity left-coalition will win an outright majority in June. A majority of Greeks still want to remain in the euro. There was news of millions being withdrawn from banks by account-holders fearing the drachma's return would devalue deposits. Indeed, the single currency completely gave back earlier gains after a rumour leaked that the ECB had withdrawn its credit line to Greek banks. Commentary from leading ECB and Bundasbank officials expressing their doubt at the suitability of 'certain nations' staying in the euro-zone also weighed on sentiment. The next test may be the survivability of the Greek banking sector as the crisis begins to trigger a 'run'.

GBP
The pound fell on Wednesday after the Bank of England's (BOE) quarterly inflation report proved more doveish and down-beat than expected. The report forecast a drop in inflation to only a 1.6% rate in 2014, which potentially left the door open to further quantitative easing. Growth forecasts were also revised down to 0.8% from 1.2% previous in 2012 and 2.6% from 3.0% in 2014. These combined to heighten speculation that the BOE would increase its asset purchases. Chairman of the BOE, Mervyn King, warned the greatest threat to the U.K's recovery came from the euro-zone with the “risk of a storm heading our way from the continent.” Sterling fell heavily on the news and even made losses against the euro, although these were offset by rumours later in the day that the ECB had cut funding to Greek banks. The pound gained some succour from other data, which showed a fall in the unemployment rate to 8.2% from 8.4% previous -- although rises in Average Weekly Earnings (Mar) slowed to only 0.6% from 1.0% in the previous three-month period and 1.1% expected.

JPY
The yen traded mixed on Wednesday after risk trends steadied and 'Grexit' fears eased temporarily following the incorporation of a new interim government in Athens. It rose against the pound, however, after the BOE's quarterly inflation report poured cold water on recovery hopes, leaving the door open to more quantitative easing. The yen fell against the dollar, though not by much, after U.S. data cam in as expected and Industrial Production showed an increase in output. The yen may have been weighed by negative data from last night, which showed a fall in Machine Orders and the Tertiary Industry Index also down. The slowdown in the economy could spark calls for more quantitative easing from the BOJ, as there is already pressure for more easing to help weaken the yen and restore exporter competitiveness. In this sense, GDP figures out tonight will be key as they, more than anything, will impact on the near-term monetary policy outlook.