May 15-MAR--

By Peter Trevor
London, May 15 (BridgeNews) - Trading on the foreign exchanges was again torpid in the European session Tuesday as the markets awaited the outcome of the Federal Open Market Committee (FOMC) meeting due after the close of the session. The Japanese yen weakened in option-related trading, while the Australian dollar recovered from an early bout of selling.
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U.K. inflation came in slightly above forecast in April, but had
little impact because players refused to commit themselves before FOMC result.
The dollar/yen pair pushed to a two-week high of 123.69 as a range of players, with a Swiss name said to be prominent among them, targeted reported knock-out option strikes at 123.50. However, the lack of follow-through action after 123.50 was surpassed suggests the option was for only a small amount, if there at all.
The euro/dollar pair drifted in an extremely narrow range under the 0.8750 level until a sizeable buy order from a German name took it to a two-day high of 0.8788. Coupled with the gains in the dollar/yen pair, this helped the euro/yen cross push to a five-day high of 108.57.
A range of generally healthy euro-zone economic data failed to lift the markets out of their torpor. German wholesale prices rose a below-forecast 0.4% on the month in April, while Italian industrial output rose an as-forecast 0.5% on the month in March, up from no change in February. Italian gross domestic product rose 0.7% in the first quarter of the year, in line with analysts' forecasts.
However, Germany's Handelsblatt newspaper, in its euro-zone economic indicator released Tuesday, said the euro-zone economy could weaken until autumn this year.
Bundesbank board member and Hesse State Central Bank president Hans Reckers said Tuesday he saw little maneuvering room for an interest rate cut, due to the high German April inflation rate of 2.9%.
Reckers said he also saw no danger of a recession in the German economy "despite most recently posted weak economic data".
Speaking to reporters on the sidelines of a euro conference in Lisbon, European Central Bank (ECB) executive board member Eugenio Domingo Solans and Bank of Portugal governor Vitor Constancio stressed Tuesday that the ECB could not allow its rate decisions to be dictated by market expectations.
Solans said: "We take our decisions when we decide we should take them. We cannot consider external pressures."
Constancio separately insisted it was "not the role of monetary policy to follow all the expectations of the markets."
Sterling showed little reaction to data that showed U.K. underlying RPIX inflation rose a slightly above-forecast 2.0% on the year in April, driven by a surge in utilities prices. The euro/sterling cross picked up on the euro's gains elsewhere to hit a two-day high around 0.6190 in the afternoon, while cable was lifted to a two-day high around 1.4210.
Selling from a U.S. name and an Australian player in early trading took the Australian dollar/U.S. dollar to a one-week low around 0.5150, traders saying the move was prompted by a desire to be holding U.S. dollars ahead of the FOMC's interest rate decision.
However, fuelled by the euro's gains of the afternoon, the pair had recovered to the 0.5180 area by the close.
The Swedish krona was undermined by some poor Swedish inflation data.

Swedish inflation rose a strong 2.9% on the year in April, up from a 1.9% year-on-year rate in March. The euro/Swedish krona cross was lifted from opening levels just under the 9.0 figure to a two-day high around 9.0340.
However, in the minutes of the Riksbank's April 26 policy meeting, one of the policy board's members said the repo rate might have to be raised if the stock market continues to perform well.
This was enough to turn the krona around, sending the cross to an intraday low around 8.9845 toward the European close.