by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar was unable to strengthen back through the 1.57 level on Friday and weakened to test support levels around 1.5780 as US equity markets remained fragile.
The US economic data again failed to have a major impact. There was a strong 1.9% increase in personal income for May reflecting the impact of tax rebates and spending also rose a solid 0.8% over the month. The University of Michigan consumer confidence index edged slightly lower in the final reading to 56.4 from a provisional 56.7, maintaining the very poor run of consumer sentiment data.
As far as inflation is concerned, the core PCE price index was held to 0.1% for May compared with expectations of a 0.2% increase while the annual increase was in line with expectations at 2.1% which should not have a significant impact on interest rate expectations.
The Euro-zone data remained generally weak with a further small decline in consumer confidence for the month while there was a bigger than expected decline in business sentiment to 0.14 in June from 0.58 the previous month. The data will reinforce expectations of a sharp slowdown in the economy and increase pressure for the ECB to hold back on an interest rate increase.
The ECB will want to maintain a tough stance, especially as inflation fears have also increased, but pressure for a hike to be abandoned will grow if equity markets continue to weaken next week.
Yen
The Japanese data recorded a sharp rise in inflation with the core annual increase rising to a 10-year high of 1.5% for May from 0.9% the previous month as fuel prices rose sharply.
The growth-related data was mixed with household spending falling 3.2% over the year while there was a larger than expected 2.9% increase in industrial production. The Bank of Japan has not given any clear suggestion that an increase in interest rates will be considered and the Japanese currency will remain vulnerable to capital flows on yield grounds.
The yen will gain some protection if there is a further sharp decline in global stock markets, although there is likely to be selling on any significant rallies. There were fresh yen gains to 105.90 in New York with the Japanese currency also strengthening to 167.0 against the Euro.
Sterling
The UK currency briefly dipped to lows of 1.9810 against the US dollar before regaining ground and strengthening to a 7-week high above the 1.99 level in US trading. The UK currency firmed against the Euro, but hit tough resistance close to the 0.79 level.
UK GDP growth for the first quarter was revised down slightly to 0.3% from the provisional 0.4% as services-sector growth slowed. The PMI data next week will be very important for underlying currency sentiment.
The current account position recorded a lower GBP8.5bn deficit for the first quarter from a revised GBP12.2bn previously which was close to 2.5% of GDP. For the second quarter running, lower overseas earnings in the financial sector narrowed the deficit which is not very supportive for the UK currency.
Swiss Franc
The Swiss franc strengthened to highs just beyond the 1.6050 level against the Euro on Friday as risk appetite continued to decline. The franc also pushed to highs near 1.0160 against the US currency.
Risk conditions will still need to be watched closely as a further escalation in credit fears could trigger substantial franc buying. The franc also gained some support from a Russian central bank report that it could push funds into the Swiss currency.
Potential Swiss currency support is liable to be limited by underlying fears over the Swiss banking sector.
The KOF leading index also weakened to 1.01 in June from 1.08 the previous month, maintaining the steady deterioration seen over the past few months from highs above the 2.00 level. The decline to a 5-year low will reinforce expectations of an underlying economic slowdown.
Source: VantagePoint Intermarket Analysis Software
Australian dollar
The Australian currency gained some further support from a strong increase in gold prices which was offset by an increase in risk aversion. There were no major domestic developments with the Australian dollar pushing back towards the 0.96 level as there was buying support on dips with buying support from Japan.
The strength in commodity prices helped trigger further Australian dollar gains to 0.9630 in US trading and the key feature is likely to be an increase in short-term volatility. The Reserve Bank interest rate decision and statement will be important for sentiment next week and increased fears over the growth outlook would tend to undermine the Australian dollar.
