EUR/USD
The Euro continued to challenge resistance levels above the 1.32 region against the dollar during European trading on Wednesday. There were reports of firm corporate demand for the currency which provided underlying support. The German government upgrade its 2013 growth forecasts and also called for an eventual return to normality for ECB policies.
There were still very important tensions surrounding the Euro-zone. French presidential candidate stated that he would not ratify the fiscal compact in its current form and there were also rumours of a French rating downgrade.
The latest US durable goods orders data was sharply weaker than expected with a headline 4.2% decline for March as aircraft orders dropped heavily and there was 1.1% underlying decline which will create fresh doubts over investment trends.
The Federal Reserve left interest rates on hold at the latest policy meeting and also maintained its commitment to maintaining very low interest rates. There was a 9-1 vote for the statement with Lacker again dissenting as he opposed the pledge to keep rates at exceptionally low levels through the end of 2014.
The Fed upgraded its growth forecasts for 2012 and was more optimistic surrounding the labour market, but there was still a very notable underlying tone of caution with comments that global financial turmoil still posed important downside risks to the economic outlook. Fed Chairman Bernanke maintained a broadly unchanged stance in his press conference with a promise that the Fed would maintain a highly accommodative policy and would be prepared to take further action if required.
Although the dollar attempted to rally following the Fed meeting, it was unable to make much headway and the Euro regained ground later in the US session as the overall broadly dovish Fed tone limited dollar support on defensive and yield grounds with the Euro moving back above the 1.32 level.
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Yen
The dollar found support close to 81 against the yen during Wednesday and maintained a generally stronger tone during the day even with a weaker than expected durable goods orders report. The dollar failed to gain sustained support from the Fed meeting as there was no improvement in yield support.
There were further expectations that the Bank of Japan would announce additional quantitative easing at Friday’s meeting and the yen also lost some defensive support as risk appetite improved in line with gains in European equity markets.
Although equity markets remained firm in Asia on Thursday, the yen was able to resist further losses as the dollar edged back towards the 81 level.
Sterling
Sterling held a firm tone in early Europe and briefly attacked resistance near 1.6170 against the dollar before retreating sharply following the latest GDP data.
The ONS reported that the UK economy contracted by 0.2% in the first quarter of 2012 following a 0.3% decline the previous quarter. Officially, this put the economy in recession for the second time in three years as a small gain in the services sector was not enough to offset weak manufacturing and a sharp decline in construction output.
There was an important element of suspicion surrounding the data with expectations that it would be revised higher. Nevertheless, there was some speculation that the Bank of England would have to consider additional quantitative easing at the May meeting. The data was also politically damaging for the government.
Sterling found support in the 1.6080 region against the dollar and rallied to re-test the 1.6170 region later in the US session as the Euro was unable to hold above the 0.82 level. The latest Nationwide consumer confidence data recorded an increase to a nine-month high of 53 from 42 previously which helped offset the GDP impact.
Swiss franc
The dollar was unable to make any impression on the franc during Wednesday and retreated to test support levels below 0.91 as the US currency remained generally on the defensive. The Euro remained resolutely trapped near the 1.2010 level.
There was further speculation over capital outflows from the Euro-zone banking sector which provided net support for the franc. Generally weak yen support also provided some net backing for the franc as an alternative safe haven.
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Australian dollar
The Australian dollar was able to resist a further test of support close to 1.03 against the US dollar during Wednesday and pushed generally higher with a peak above 1.0350. The currency gained support from an improved tone surrounding risk appetite and a generally defensive US tone as the Fed failed to provide significant support.
This trend continued in Asian trading on Thursday as a more confident outlook surrounding risk and a generally subdued US dollar allowed the Australian dollar to push towards the 1.0380 area as commodity prices were generally firm.
