by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar remained generally weak in early European trading on Monday and dipped to lows just above 1.5630. After consolidating around the 1.56 level the US currency pushed stronger in New York trading.
The Euro was undermined to some extent by report that a European institution was looking to buy a US bank which boosted optimism over possible capital flows into the US economy.
The Euro was also unsettled to some extent by a generally downbeat set of German GDP growth forecasts from the Bundesbank. The central bank also stated that inflation was unlikely to drop to any great extent until the Autumn of 2008 and this will tend to reinforce the tough stance from the ECB on interest rates, at least in the short term. The German ZEW index will be watched very closely on Tuesday and any recovery in sentiment would help underpin the Euro with the key IFO release due on Wednesday.
There were no major US data releases, although there was a small 0.1% increase in leading indicators for April compared with expectations that they would be unchanged. The second successive marginal increase maintained confidence that there would be at least a limited economic recovery, although sentiment will remain fragile at best.
Doubts over the Euro-zone economy helped strengthen the dollar back to around 1.55 in US trading, although market positioning was also an important element.
Yen
The domestic data releases remained weak with the Reuters monthly Tankan index dipping to a five-year low of -2 in May from +1 the previous month and this was a five-year low for the index. The Bank of Japan will hold a policy meeting over the next two days, but a change in interest rates at the Tuesday announcement remains very unlikely.
Overall risk appetite remained slightly stronger and this allowed the US currency to resist any test of support towards the 103.0 level. Markets will continue to probe technical levels in the short term, although they may again prove difficult to break.
Overall risk appetite was firmer in US trading as Wall Street pushed higher and this allowed the US currency to strengthen to highs around 104.60 before a move back to 104.30 as technology stocks dipped.
Sterling
Sterling pushed to a high around 1.9620 against the US dollar on Monday, but failed to sustain the gains and then weakened sharply to lows around 1.9450 as the dollar staged a wider recovery. The UK currency was unable to make any headway against the Euro and was trapped around 0.7960.
The Rightmove organisation reported a 1.2% increase in house prices for May after a 0.1% decline the previous month, but it is important to note that the survey records asking prices and not realised prices.
Further evidence on the potential Bank of England response to weaker growth and high inflation will be examined in the central bank minutes from May’s meeting which are due on Wednesday. Overall confidence in the housing sector and economy will remain very weak which will curtail currency support.
The UK currency should still gain some support from a near-term improvement in confidence surrounding financial markets.
Swiss Franc
The Euro found support close to 1.6275 against the franc on Monday and regained the 1.63 level in US trading with a high close to 1.6370 as global equity markets attempted to strengthen again. The dollar dipped to lows near 1.0410 against the franc before gaining sharply to 1.0565 in relatively choppy trading.
The overall improvement in risk appetite tended to undermine near-term demand for the Swiss currency. There was also some caution over the Swiss banking sector which triggered some caution over the currency. A decline on the US Nasdaq index helped trigger a partial recovery in the franc and global trends will tend to remain dominant.
Australian dollar
The Australian dollar challenged highs above 0.9550 in local trading on Monday as resistance levels close to the 24-year high were tested. There were no major domestic developments with the Australian currency still gaining support on yield grounds.
There was also a renewed increase in commodity prices which boosted the Australian currency. Market sentiment will remain strong, but there will be a clear risk of a sharp correction given that the domestic economy is liable to prove vulnerable, especially if there are cautious remarks from the Reserve Bank. The Australian dollar edged lower in US trading, although dips quickly attracted selling pressure.
