Sterling weakened against the dollar after the Bank of England issued a weaker growth outlook in its quarterly inflation report today. GBPUSD fell to a four-month low of 1.5888 in the London session and consolidated around those levels in the U.S. session.  EURGBP rose on the back of a weak pound to move off a 3-1/2 year low gaining some 60 pips to 0.8006.

USDJPY rose to a two-week high of 80.54 after data showed U.S. housing starts rose more than expected in April.  But dollar lost ground and fell to 80.18 yen after the minutes of the Federal Reserve April meeting were released late in the U.S. session. The minutes suggested some FOMC committee members considered more stimulus for the economy based on a gloomy growth outlook. This usually would be negative for the dollar.

The Australian dollar was weighed by risk aversion, as slower global growth would hurt the commodity-linked aussie.  AUDUSD swung from a high of 0.9966 to a low of 0.9902.

The Canadian dollar, also a commodity-linked currency also weakened, with USDCAD rising to 1.0126 from  1.0053.

According to a report by the U.S Commerce Department, housing starts rose 2.6 percent  in April to a seasonally adjusted annual rate of 717,000 units. March’s starts were revised up to a 699,000-unit pace from a previously reported 654,000 unit rate.

A separate report released a little later showed manufacturing demand and output still seems to be expanding at a moderate pace in the U.S.

Industrial production rose more than expected in April, driven by auto manufacturing and utility use. Data show an increase of 1.1 percent, which is the most since December 2010, after a 0.6 percent decline in March that was revised from no change. The forecast was for a drop of 0.6 percent in April’s number.

USDJPY hit a high of 80.54, the highest since May 2 after the housing report.

GBPUSD tumbled 0.6 percent from the Asian session to a one-month low of 1.5888. Sterling is weighed by a dovish Bank of England which gave a gloomier outlook in UK growth ahead, raising the possibility of more QE3. Bank of England Governor Mervyn King left the door open for more stimulus measures despite high inflation and a fall in jobless claims. But the BOE took a gloomier view of growth ahead.

EURGBP rose on the back of a weaker pound and was just shy of the key 0.8000 level. In early European session trading the euro had plunged to a new 48-month low of 0.7948 before bouncing to 0.7997.

USDCHF nudged higher to a new four-month high of 0.9469 in early European trading on continued dollar strength due to safe haven demand. The greenback has gained 4.7 percent against the Swiss franc so far this month.

USDJPY finally broke out of a range and rose to 80.50, the highest level since May 3. The focus is on the Federal Reserve policy meeting minutes to be released later today which will give details of the April FOMC meeting. Markets will look for any hints on more quantitative easing. This would be negative for USD.

AUDUSD plumbed to a five-month low of 0.9869 in the early Europe session before recovering some losses to 0.9912.

COMMENTS ON MONETARY STIMULUS:

“The real question is how much monetary stimulus we inject into the economy and I think what’s quite important that people don’t run away with the thought that because there are uncertainties and unexpected things happen therefore we should abandon the view that the major instruments of macroeconomic policy can work. They can work and the MPC will have to make a judgement month by month as to whether it does or does not want to inject more monetary stimulus.”

COMMENTS REGARDING BOE ASSET PURCHASE PROGRAMME:

“What’s happening in the euro area will affect our asset purchase programme via our judgment about the outlook for inflation and growth in the medium term, but if there were to be major developments in the euro area there are all sorts of ways in which we might have to respond and I don’t want to limit it or to restrict it or to link it one-to-one to the asset purchase programme.”

COMMENTS ON STERLING’S DEPRECIATION:

“The developments in recent weeks have not been entirely unexpected given what is happening in the euro area. We have to accept that and feed that into our judgment as to what we should do for own policy.

“There is no doubt that the big depreciation – 25 percent – that is still intact broadly speaking (and) is a vital part of the rebalancing, it is an absolutely essential part.”

COMMENTS  ON THE EURO ZONE:

“We have been through a big global financial crisis, the biggest downturn in world output since the 1930s, the biggest banking crisis in this country’s history, the biggest fiscal deficit in our peacetime history, and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution.

EURUSD extended its decline in the Asian trading session and touched a fresh four-month low of 1.2697, the lowest since January 17. Euro is down 1.5 percent against the dollar since Monday.

EURJPY traded near a three-month low, ranging between 102.08 and 102.36.

EURGBP hovered near 3-1/2 lows of 0.7951 reached late in the US session on Tuesday.

GBPUSD tumbled to a low of 1.5955, down 0.8 percent since yesterday. Focus turns to the UK jobs report due later today. Weak data could further weigh on the pound.

The US dollar strengthened against most risk currencies due to safe haven demand. This lifted the ICE dollar index to 81.39, marking its longest stretch of gains in almost 40 years.

USDJPY rose to 80.38, up 0.6 percent since yesterday.

AUDUSD fell to a new four-month low, as far as 0.9903 as a result of the strong dollar and risk aversion, down from 0.9934 at the Asian session open.

Euro fell against other major counterparts too. EURGBP touched a low of 0.7951, the lowest since November 2008.

EURJPY fell to a three-month low of 102.06.

Sterling fell below the key psychological support level of $1.60 for the first time in a month, and a break below that level accelerated a decline to 1.5987 in late New York trading.

The broadly stronger dollar rose against the yen after being bolstered by some positive U.S. economic data that gave optimism to the recovery. U.S. home builder sentiment improved in May to its highest in five years, signalling stabilization in the housing market that has been sluggish. Also the Empire State manufacturing index rose by more than expected.  USDJPY rose to 80.32, up 0.6 percent on the day.

The greenback rose above parity against the Canadian dollar, with USDCAD reaching a high of  1.0072, the highest since January 25. Adding to the Canadian dollar weakness is falling crude oil prices. Crude oil is a major Canadian export and prices fell to US$93.05 in New York trading, down from an earlier high of US$95.45.

Meanwhile, at the same time, a separate report was released on the April US retail sales data.

US retail sales number rose by 0.1 percent in April which was lower than the sharp gains in the first three months of the year. Expectations were for sales to rise by 0.2 percent.

March numbers were revised down to 0.7 percent  from 0.8 percent and the increase in February was also revised down to 1.0 percent from 1.1 percent.

Sales data are closely watched because consumer spending in the US accounts for as much as 70 percent of the economy and helps with economic growth.

Although the data were mixed, the dollar jumped against yen. USDJPY rose to 80.05 from 79.83.  This is the first time the dollar breaks above 80 yen since Monday.

EURUSD bounced off 1.2813 and rose to a session high of 1.2868. But euro remains vulnerable to headlines news out of Greece, which has yet to form a government.

Cable reached a new three-week low below 1.6036 in London trading, driven by sterling weakness against the broadly rising euro today. EURGBP rose to a session high of 0.8013, up 0.6 percent on the day. UK trade balance data released today show a continuing trade deficit.

USDCHF was due for a correction after a strong rally yesterday to a four-month high of 0.9371. The pair eased to 0.9333 in the European session.

The broad recovery in the euro helped lift EURJPY to 102.86 from the Asian session low of 102.26.

USDJPY showed a slow grind to 79.95, clawing back some losses after yesterday’s sharp drop to 79.67. A more upbeat sentiment today has taken demand away from the safe haven yen.

The Australian dollar bounced off five-month lows to rise back above parity with the US dollar. AUDUSD hit a high of 1.0014, rising from the Asian session low of 0.9944 when the aussie was dragged down following the RBA policy meeting minutes which signalled further rate cuts to come.

On the economic calendar, in the upcoming US session we have US retail sales and core CPI data. Focus will be on the US dollar reaction to the data.

The monthly index of investor and analyst expectations fell to 10.8 from 23.4 in April. The current situation index increased to 44.1 from the previous 39.0. On the index, a level above 0.0 indicates optimism, whereas a level below 0.0 indicates pessimism.

In contrast, the euro zone economic sentiment index turned negative for the first time in three months in May, dropping by 15.5 points to minus 2.4 from April’s reading of 13.1 in April. The forecast was for economic sentiment to ease down by less, just 1.4 points to 11.7.

The indicator for the current economic situation in the euro zone has decreased by 11.2 points and now stands at minus 60.2 points.

Commenting on the report, ZEW President Wolfgang Franz said, “Against the backdrop of the sovereign debt crisis in the euro zone, economic risks have risen during the previous weeks according to the financial market experts.”

Recent concerns over the uncertain Greek political situation and the inability of Greek leaders to form a stable government has rattled markets and weighed on the euro. Talks of a possible Greek exit from the euro would cause European governments to lose huge sums of money lent to Greece, and would likely throw the entire region into economic turmoil.

The euro did not react much to the data, and maintained the bounce from earlier4-month lows to rise against the dollar in the European session. Helping the recovery in the euro was the earlier German GDP data which showed Germany grew five times more than expected in the first quarter of 2012.