EUR/US$

The Euro challenged levels above 1.4120 on Wednesday, but was unable to sustain the gains and dipped weaker from early in the New York session. The Euro was undermined to some extent by Swiss National Bank intervention which provided wider US currency support.

The ECB allocated EUR442bn in its debut one-year refinancing operation. This was higher than expected which increased speculation that there wee still very important stresses within the Euro-zone banking sector. There will also be speculation that a significant amount of funds were taken by banks outside the Euro area which would be likely to weaken the Euro. The OECD also stated that there was scope for ECB to cut interest rates further.

The US data was mixed as the durable goods orders data was stronger than expected with a second successive 1.8% monthly increase. In contrast, there was a weaker than expected figure for new home sales with a slight decline to an annual rate of 342,000 in May from 344,000 previously.

As expected, the Federal Reserve left benchmark interest rates on hold following the latest FOMC meeting and also stated that rates will stay low for an extended period. The statement was slightly more optimistic over economic trends with comments that policy actions should contribute to a gradual recovery while inventories were more in line with production. The Fed also removed the previous warning that inflation could be undesirably low.

The comments overall will provide some degree of dollar support, especially with no expansion of the bond-buying programme and the US currency strengthened to the 1.39 region following the meeting.

Source: VantagePoint Intermarket Analysis Software

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Yen

The headline Japanese trade account remained in surplus for May, but the annual decline in exports was slightly higher than expected at 40.9% compared with 39.1% the previous year. There was still optimism that the industrial sector would continue to recover in the short term. Bank of Japan official Nakamura still warned that corporate financing conditions were still severe

There is still the potential for institutional dollar buying on dips to below the 95 level which will make it difficult for the Japanese currency to extend gains and the yen weakened to around 95.60 in early Europe.

The yen proved to be resilient against the dollar following the Fed interest rate decision and strengthened back to 133 against the Euro.

Sterling

Sterling held firm in early Europe on Wednesday and then re-challenged 2009 highs around 1.66 against the dollar.

The UK CBI retail sales data recorded a figure of -17 for June, unchanged from the previous month while retailers expected a further decline for July. The OECD forecasts were mixed as the 2009 GDP forecasts was revised to show an even sharper contraction while there was an upgrade for the 2010 figure.

Comments from Bank of England officials again had a significant market impact. Bank Governor King and other MPC members were very cautious over the economic outlook with King repeating comments that the recovery was liable to be protracted while there was a very high degree of uncertainty.

He again warned over the fiscal position and called for the government to tighten policy if there was any sign of economic recovery. The outlook, together with stresses between the bank and government, will tend to undermine sentiment to some extent.

Sterling retreated to 1.64 against the dollar due to measured independent selling and the firmer US currency.

Swiss franc

The dollar remained under pressure in early Europe on Wednesday with lows below the 1.0650 level. There was a sharp reversal in trends ahead of the US market open as the franc weakened sharply.

There was strong evidence that the National Bank was intervening in the market through the BIS. As well as intervention on the Euro/Swiss cross, there was also evidence that the bank had intervened to buy the dollar directly. In response, the Euro strengthened sharply to above 1.52 against the franc while the dollar also gained sharply.

As the US currency was able to secure wider traction, the dollar pushed to test levels above 1.10 against the franc in New York.

Source: VantagePoint Intermarket Analysis Software

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Australian dollar

The Australian dollar proved to be generally resilient on the crosses during much of Wednesday as risk appetite was generally firmer while commodity prices also attempted to rally. The currency pushed to a high of 0.8050 and initially resisted selling pressure even when the US dollar lost ground.

The Federal Reserve optimism over improved economic conditions should provide some degree of Australian dollar support, but it dipped to 0.7950 later in the US session.