by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The Euro was unable to make any headway in early Europe on Thursday and weakened sharply over the rest of the day.
The German IFO index weakened to 102.4 in April from 104.8 the previous month which was significantly below expectations. The sharply monthly downturn will increase fears over a significant slowdown in the German and wider Euro-zone economy, especially as there was also a sharp downturn in the important Belgian industrial confidence indicator released on Wednesday.
The ECB remains determined to maintain a tough policy stance to curb inflationary pressure in the economy. There will, however, be an increased risk of policy splits if there is evidence of a deeper downturn in the economy. In comments on Wednesday, for example, Bonello who represents Malta stated that it was hard to argue for higher interest rates.
The US data was mixed, but offered some degree of forward-looking optimism. There was no evidence of recovery in the housing sector with new home sales falling to a fresh 17-year low annual rate of 526,000 in March from a revised 575,000 rate the previous month while inventories continued to increase.
Headline durable goods orders also fell by 0.3% in March, but there was a 1.5% underlying increase which will trigger some hopes for stabilisation in the industrial sector. Initial jobless claims also fell to 342,000 in the latest week from 375,000 previously.
There have been media reports that The Federal Reserve would cut interest rates by 0.25% next week and then look for a pause in the rate-cutting process to assess economic trends. An adjustment in rate expectations will provide some degree of dollar support in the short term and the dollar strengthened to a peak of 1.5635 before settling around 1.5680.
After initially consolidating above the 103.0 level against the yen in Asian trading on Thursday, the US currency edged higher to around 103.70. Advances were curbed to some extent by exporter selling and the latest capital account data has also not suggested substantial capital outflows which will underpin the Japanese currency to some extent.
Immediate yen demand has been lessened by a net positive bias in regional stock markets while a narrowing of credit spreads has also been important in boosting confidence in carry trades.
Wider dollar gains and a recovery on Wall Street pushed the US currency to highs around 104.50 in New York while the yen regained some ground against the Euro.
Sterling found support close to 0.8030 against the Euro during Thursday and strengthened to around 0.7945 during the day. The UK currency also found support below the 1.97 level against the dollar, butt here was a net loss for the day. Improved conditions in financial markets offered some support to the UK currency.
UK retail sales volumes fell 0.4% in March with the year-on-year increase slowing to 4.6% from 6.3% previously, although the impact will be lessened by the fact that there were upward revisions to previous months.
The GDP data will be watched closely as the degree of slowdown recorded in the data will be important for sentiment. Markets are expecting a slowdown in quarterly growth to 0.4% from 0.6% previously and any drop to below this level would damage Sterling.
The dollar found support below the 1.0150 level on Thursday and strengthened strongly to a peak above 1.0350 which was the highest level since early March. The franc also lost ground against the Euro with lows around 1.6240 even though the Euro was generally on the defensive against major currencies.
Some speculation over a pause in US interest rate cuts undermined the Swiss currency and the rally on Wall Street also curbed short-term demand for the franc as there were no major negative surprises from the US corporate earnings.
Source: VantagePoint Intermarket Analysis Software
The Australian dollar peaked close to 0.9540 against the dollar, but was then subjected to a correction weaker. The US currency secured a wider recovery which triggered some profit taking while there was also a dip in metals prices which curbed demand for the local currency.
The domestic factors were limited, but the reports of some isolated areas of difficulties within the housing sector undermined confidence in the economy to some extent. The Australian dollar dipped back towards 0.9460 and will remain vulnerable to a further correction if metals prices continue to weaken.
Wider US currency gains and a dip in commodity prices pushed the Australian dollar down to lows below 0.94 in New York.