EUR/USD
The Euro was unable to make any fresh attack on the 1.28 region against the dollar on Monday and drifted weaker to test support below 1.2740 before rallying again during the US session. There was further evidence of caution over aggressive Euro selling, especially with speculative short positions at a record high which maintained fears over a positioning rally.
The French government continued to promote Eurobonds as the solution to the Euro-zone debt crisis while the plans continued to meet tough resistance from the German Chancellor Merkel. Tensions continued to increase ahead of an informal EU Summit due to be held on Wednesday as pressure for German concessions continued to increase.
Geek political parties continued to campaign ahead of the June 17th general election with New Democracy leader Samaras stating that he would lead a pro-European front while Syriza continued to campaign against the austerity programme. There was a small increase in optimism that a pro-austerity government could be formed which curbed Euro selling.
There were further fears surrounding the Spanish economy, especially after another upward revision to 2011’s budget deficit while sentiment surrounding the banking sector remained extremely fragile amid fears that a further bailout would be required.
Regional Fed President Lockhart stated that there was no need for further quantitative easing at this stage, but that it could not be excluded if there was a sharp deterioration in the economy. Emerging-market currencies generally remained under pressure during the day with the Indian rupee at a record low and an underlying flow of funds into the US currency will also help protect it against major currencies such as the Euro. The Euro consolidated just below 1.28 on Tuesday as market caution persisted with further resistance above 1.2810.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar resisted a further test of support in the 79 region against the yen on Tuesday and nudged higher towards the 79.50 area, but there was no major test of resistance. There was further speculation over a further monetary-policy easing the Chinese central bank which had some positive impact on risk conditions and curbed defensive yen demand.
The impact was offset by persistent fears over a sharper than expected downturn in the Chinese economy. There was also speculation that regional competitiveness issues would maintain pressure for yen gains to be resisted. In this context, there was also pressure for the Bank of Japan to relax monetary policy further at the Wednesday policy meeting. Risk appetite was slightly firmer in Asia on Tuesday which curbed immediate yen demand as the Euro continued a technical recovery.
Sterling
Sterling hit resistance close to 1.5830 against the dollar on Monday and drifted weaker, but ranges were extremely narrow. Sterling moved slightly weaker against the Euro as it tested important support in the 0.8090/0.8100 region.
There were very little domestic incentives with markets very cautious ahead key events on Tuesday and Wednesday. A lower than expected inflation reading on Tuesday would give the Bank of England greater scope to introduce further quantitative easing. If demand conditions are sufficiently weak there is little doubt that the central bank will act to boost bond purchases anyway, but lower inflation would give the move greater credibility.
The latest government borrowing data will also be watched closely with markets looking to assess whether revenue held up at the start of the fiscal year. Sterling consolidated just above the 1.58 area against the dollar in Asia on Tuesday in subdued conditions.
Swiss franc
The dollar found some support below 0.94 against the franc on Monday, but was unable to make significant headway with gains capped below the 0.9450 area. There was no relief for the Euro as it remained trapped close to 1.2010 and a key feature has again been that any wider recovery in the Euro is not being translated into an advance against the Swiss currency.
Any comments from National Bank officials will remain under very close scrutiny in the short term. There will be the potential for additional defensive demand for the Swiss currency if there is resistance to dollar and yen gains.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar was able to resist a further test of support in the 0.98 region against the US currency on Monday and moved significantly higher later in the New York session as risk appetite attempted to improve as equity markets moved higher.
There was still a mood of unease surrounding regional growth prospects which had an important impact in dampening underlying demand for the currency, especially with fears that Chinese demand is continuing to decelerate. In this context, the Chinese HSBC manufacturing data due on Thursday will be important for both Chinese sentiment and the Australian currency.
