Important Reservations Surrounding the Euro-Zone Outlook


The Euro maintained a firm tone during the European session on Thursday, although it was unable to break resistance levels. There was further speculation surrounding the prospect for ECB peripheral bond buying with a further series of rumours surrounding potential action and some possible comments that there could be unpublished targets for peripheral bond caps which was met by a high degree of market scepticism.

There was a slightly stronger than expected reading for the Euro-zone PMI manufacturing index, but there was a decline in the services-sector index and there were still important reservations surrounding the Euro-zone outlook, especially as the orders component continued to weaken sharply. This maintained cautious sentiment and consumer confidence also deteriorated further in the latest release.

There were reports from Spanish officials that technical negotiations were taking place surrounding a potential sovereign bailout, but that any decision was unlikely before mid September. The net impact was to provide some Euro support. German and French officials put pressure on Greece to adhere to the reform commitments as talks continued.

The US releases did not have a major impact as US new home sales was stronger than expected with a figure of 372,000 for the latest week from a revised 359,000 previously while there was a small increase in jobless claims to 372,000 for the week. The PMI index for the manufacturing index edged higher to 51.9 from 51.4 previously.

There was a further debate surrounding quantitative easing during the day. Regional Fed President Bullard stated that the FOMC minutes were slightly stale and that there had been a run of more favourable data since they were released. In this environment, Bullard stated that he would not back further easing at this stage and market expectations were dampened slightly which curbed Euro buying support. The Euro consolidated just below the 1.2580 level later in New York with no significant changed in Asia on Friday.


The dollar was unable to gain any momentum during the European session on Thursday and after failing to rise above the 78.70 area, there was a decline to the 78.35 area during New York trading.

The yen gained defensive support from a decline on Wall Street as risk appetite deteriorated and there were further concerns surrounding the global growth outlook. There was a 0.2% decline in wholesale prices over the year which did not have a major impact. Competitiveness pressures will remain important in the short term, especially with concerns over the Japanese outlook and the regional growth outlook.

The government denied that further measures to weaken the yen were being considered, but pressure for additional Bank of Japan action will continue and the dollar was able to edge higher in Asian trading on Friday.


Sterling hit resistance close to the 1.59 level against the dollar and drifted weaker during the day, although ranges were relatively narrow.

There was a weaker than expected reading for the latest CBI retail sales reading with a decline to -3 from 11 the previous month and there was only a small offsetting impact from a slightly stronger than expected reading for mortgage approvals. The net impact was to maintain concerns surrounding the UK outlook and underlying fundamentals, especially with unease surrounding the AAA credit rating.

Any move to cut the rating would inevitably put Sterling under strong selling pressure even if there was only a short-term impact. Markets will also monitor defensive inflows into Sterling closely as the Euro-zone negotiations continue.

Swiss franc

The dollar found some support on dips to below the 0.9550 area on Thursday and edged back to the 0.9570 area during the New York session as ranges narrowed during the day. There was again no movement in the Euro.

The continuing speculation over further Federal Reserve easing and the potential for quantitative easing by the ECB will continue to maintain speculation of defensive capital inflows into the Swiss currency with markets also assessing any reserve diversification moves by the National Bank given the impact on major currency pairs.

Australian dollar

The Australian dollar hit resistance above the 1.05 level against the US currency on Thursday and retreated steadily during the day with lows below 1.0440 during the New York session.

There were further concerns surrounding the global growth outlook which undermined the currency. There were doubts whether the Swiss National Bank had actually been diversifying into the Australian dollar, although comments from Reserve Bank Governor Stevens suggested they had. Stevens also expressed some expectations that weakening terms of trade would undermine the currency.


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