EUR/USD
The Euro found support on dips to below 1.2250 against the dollar on Tuesday and had a slightly firmer tone during the US session in choppy trading conditions. There was evidence of position adjustment during the day with the Euro seeing some support on month-end demand, especially against Sterling which helped provide some underlying support.
There was further caution ahead of Thursday’s crucial ECB meeting with hope that the central bank would take further action tempered by unease surrounding the risk of disappointment. The German Finance Minister stated that there had been no talks on granting the ESM a banking licence which dampened hopes for the fund being able to unleash unlimited intervention to bring down peripheral bond yields.
There were further fears surrounding the Greek situation with Finance Ministry officials stating that Greece was running out of cash. More positively, there were reports that Spain had secured German agreement for help to bring Spanish yields down. As far as economic data is concerned, there was an increase in unemployment to a record 11.2% while the flash inflation estimate was unchanged at 2.4%.
The latest Swiss National Bank reserves data reported that there was a substantial increase in the proportion of Euro reserves held by the bank which will maintain the risk of further underlying selling by the bank to rebalance reserves.
There was a stronger than expected reading for consumer confidence at 65.9 for July from a revised 62.7 previously while there was a 0.7% decline in the Case-Shiller house-price index in the year to May. The Chicago PMI index increased to 53.7 for the month from 52.9 previously. There was, however, a subdued reading for consumer spending, but the net impact may be to dampen expectations of further Fed action.
The Euro peaked in the 1.2330 region before drifting weaker later in the US session and consolidating around the 1.23 region with caution ahead of key events over the next few days and the dollar could dip sharply if the Fed announces fresh measures.
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Yen
The dollar was unable to push above the 78.30 region against the yen on Tuesday and dipped back towards support levels near 78.10 later in the New York session.
A firmer than expected consumer confidence reading provided some initial relief for the US currency, but it was unable to gain sustained support. There were further concerns surrounding the global economy which provided underlying yen support, especially with expectations that the Japanese currency historically gains ground during August.
Finance Minister Azumi rejected calls for the Bank of Japan to buy foreign bonds in order to help weaken the yen as this would be contrary to the bank’s statutes and this had some impact in underpinning the yen.
Sterling
Sterling was unable to move above resistance in the 1.5730 region against the dollar on Tuesday and retreated to test lows around 1.5630 before consolidating just above 1.5650 in choppy trading conditions. There was Euro demand against Sterling related to month-end demand which had a significant impact in eroding support.
There were further economic doubts following Moody’s downgrading of growth prospects and the maintenance of a negative outlook on the AAA rating.
There was a reluctance to commit funds ahead of the Thursday interest rate decisions. Uncertainty over ECB actions which will have a significant impact on defensive Sterling demand was compounded by some unease surrounding the Bank of England monetary policy meeting with the UK currency consolidating around 1.5670.
Swiss franc
The dollar found support below 0.9750 against the franc on Tuesday with gains stifled in the 0.98 region. The Euro briefly moved to a one-month high around 1.2020 before weakening back to the 1.2010 area.
There were further considerations of the cost of intervention, although the National Bank did manage to return to profit for the latest six-month period. There was some evidence that short Euro positions were being covered ahead of the ECB decision in case there were more radical actions to support the Euro which could ease capital flight, but underlying pressures appeared to return quickly.
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Australian dollar
The Australian dollar pushed to a high near 1.0540 against the US currency on Tuesday before drifting back towards the 1.05 area as it retreated from record highs against the Euro.
There was further speculation over a Chinese move to lower reserve ratio requirements again in the short term which was important in providing some underlying support for the Australian currency and offsetting the impact of a slightly weaker Chinese PMI report.
The domestic data was weak with a slide in the manufacturing PMI index to 40.3 from 47.2, maintaining fears surrounding the industrial sector.
