EUR/USD
The Euro found support close to 1.3250 against the dollar during Monday and rebounded to near 1.3350, but it was unable to make a decisive move and settled just above 1.33 after surviving another test of support late in the European session.
Trading activity was generally subdued with US markets on holiday and this also ensured that Euro-zone events tended to dominate.
Euro-zone Finance Ministers met on Monday and there will be a further meeting of EU ministers on Tuesday with the Euro-zone support fund (EFSF) continuing to be a very important focus. There will be pressure for the fund’s scope and terms to be improved, but there will also be further German resistance to any major changes with Finance Minister Schauble stated that there was no need to expand it. Any public divisions would certainly unsettle the Euro, although official will attempt to maintain a united front.
There were renewed concerns that bond market stresses would return, especially as Spain cancelled planned bond auctions for next week and announced that it would hold syndicated sales instead. There was also further speculation that Portugal would eventually be forced into a rescue agreement.
As far as monetary policy is concerned, ECB member Orphanides stated that the central bank statement last week was no overly hawkish and this will tend to dampen expectations of higher interest rates.
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Yen
The dollar dipped sharply against the yen in European trading on Monday with a retreat to 82.35 before a recovery to the 82.70 area. Risk appetite was generally fragile with Wall Street expected to open weaker on Tuesday and this provided support to the Japanese currency.
Although US markets were closed, there was a decline in US Treasury yields in electronic trading which tended to curb dollar demand.
The Euro-zone situation will continue to be watched closely as there will be a much reduced chance of capital outflows from Japan if there are renewed stresses within the Euro markets. The dollar was unable to make further headway and edged lower to 82.50 in Asia on Tuesday with some market talk over the risks of a renewed slide to the 80 area.
Sterling
Sterling has maintained a strong tone over the past 24 hours and, after finding support close to 1.5850, it pushed to an 8-week high close to 1.5950 against the US currency. It also advanced to a high near 0.8330 against the Euro.
The latest economic data releases provided some support for the UK currency with the Nationwide consumer confidence index recovering from the sharp fall registered last month with a gain to 53 from 45. The latest RICS house-price index was also stronger than expected with an improvement to -39% from -44%, although this still suggested considerable momentum for lower prices.
The latest consumer inflation data will be watched closely on Tuesday and any further increase in the headline rate would increase pressure for the Bank of England to raise interest rates. This would tend to support Sterling in the near term, although it is far from certain that there will be longer-term support as fears over stagflation in the economy are likely to increase, especially with high risks to domestic demand.
Swiss franc
The Euro was unable to make a fresh challenge on the 1.29 area against the franc on Monday and retreated steadily to lows just below 1.28. The dollar was also unable to make any headway and retreated to re-test support near 0.96.
Following the government meetings last week, there was no evidence of a fresh stance by the National Bank which lessened speculation over any immediate intervention to weaken the Swiss currency.
There were also renewed doubts over the Euro-zone fundamentals which tended to support the franc, although conditions were still relatively calm in comparison with recent weeks.
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Australian dollar
The Australian dollar found support on dips towards 0.9850 against the US currency on Monday and rallied to a high near 0.9960 before consolidated above 0.99. Fears over the impact of flood damage have tended to recede further which has lessened selling pressure on the Australian currency and yield support remains strong.
Underlying risk appetite was still slightly weaker and there will be further concerns over the Asian growth outlook, especially as China may be forced to take further measures to curb inflationary pressures which would also tend to weaken commodity prices.
