Series of Important Comments From German Officials

EUR/USD

The Euro peaked just above 1.39 against the dollar in Europe on Monday, but was then subjected to a sharp reversal later in the day. The Euro-zone debt crisis continued to dominate markets with a particular focus on the EU summit this coming Sunday.

There were a series of important comments from German officials playing down the potential for a definitive solution to the crisis. A government spokesman said that it was a dream to expect that everything will be solved and this had an important negative impact on sentiment. There was a retreat in equity markets with banking-sector stocks also damaged and this had an important impact in undermining risk appetite.

Confidence was undermined by tensions surrounding a financial transactions tax with markets wary of EU leaders seeing the tax as an easy revenue option. There were further uncertainties surrounding a Greek austerity vote on Thursday and Portugal also revised its budget deficit forecasts higher. As far as the economy is concerned, the Bundesbank warned that the outlook had deteriorated further for the fourth quarter and the latest ZEW business confidence index will be watched closely on Tuesday.

The New York manufacturing PMI index weakened again to -8.5 for October from -3.9 the previous month and this was the fifth successive figure below zero which will reinforce fears surrounding the US economy. There was a slight improvement in orders, but underlying confidence deteriorated further.

There was a sharp setback on wall Street as risk appetite deteriorated and the Euro retreated to lows below 1.3750 during New York trading before recovering slightly in Asia on Tuesday as the dollar was hampered by comments from regional Fed President Evans who stated that further monetary easing should be considered.

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Yen

The dollar was again unable to break resistance above 77.40 against the yen during Monday and was subjected to a sharp retreat in US trading with lows just below the 76.80 level as volatility spiked higher again.

Risk conditions remained extremely important for the yen and there as fresh support for the Japanese currency as equity markets were subjected to fresh selling. The yen was also able to regain ground on the crosses as the Euro retreated back towards 105.50.

The latest Chinese GDP data was slightly weaker than expected at 9.1% from 9.5% which curbed any recovery in risk appetite and also lessened selling pressure on the yen while the Chinese central bank signalled a pause in yuan appreciation.

Sterling

Sterling was again unable to hold above 1.58 against the dollar and, after peaking around 1.5840, there was a significant retreat during European trading. The UK currency did have a firmer tone against the Euro and advanced to the 0.8720 area.

There was further discussion of the UK economic outlook and underlying confidence remained very fragile as growth forecasts from leading institutes were lowered again.

The latest consumer inflation data will be watched closely on Tuesday and there is the possibility that the headline rate will spike to 5.0% or more for the first time in three years. Such a rise would be unlikely to provide durable Sterling support, especially as there is no possibility of a response from the Bank of England and consumer spending power would remain under pressure. Sterling did edge back to the 1.58 area in Asian trading on Tuesday.

Swiss franc

The dollar found support close to 0.89 against the franc on Monday and advanced back to the 0.90 area during the US session. The Euro was unable to make a move above 1.24 during the day as the currency was generally weaker on the crosses.

There were rumours surrounding the resignation of National Bank president Hildebrand, but there were no fresh market developments during the day and no comments from the central bank. The European commercial banks will continue to be an important short-term focus, but official policy actions will continue to dominate franc movements.

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Australian dollar

The Australian dollar pushed to a high just below 1.0380 against the US currency in Europe on Monday as the markets continued to challenge resistance levels. Degrees of risk appetite continued to dominate market action and there was a sharp currency retreat during the day as caution prevailed and equity markets were subjected to selling pressure.

The currency retreated to lows near 1.0150 late in the US session before recovering to the 1.02 area. The latest Reserve Bank minutes confirmed that inflation fears had eased slightly and that the bank could consider lowering rates if forthcoming data confirmed recent trends with policy under review in November.

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