by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The markets were unable to break any key technical levels during Monday with caution ahead of key US events later this week. The dollar weakened to lows around 1.5690 against the Euro in European trading before gaining strongly to 1.5600 and settling around 1.5640.
There has been further speculation that the Federal Reserve will switch to a neutral policy bias following the FOMC interest rate decision on Wednesday. Futures markets have also increased the possibility that rates will be left unchanged this week to above 15% with the majority still expecting a 0.25% rate cut to 2.00%. The shift in expectations will offer some near-term dollar support, but the impact is being offset to some extent by high oil prices.
The latest US consumer confidence data will also be watched closely on Tuesday. Although another weak headline survey looks likely for this month, markets will be looking to see whether the tax rebates have any significant impact on future confidence indicators.
German consumer confidence edged stronger for March, but there will be further expectations over a sharp slowdown in the Euro-zone economy which will unsettle the Euro.
The impact of weaker data will be much large if there is any evidence of a shift in the ECB thinking on interest rates. In this context, inflation data will also remain under close scrutiny and there was a provisional drop in German consumer prices of 0.2% for April with a drop in the year-on-year rate to 2.4% from 3.1% previously. The inflation fall may temper the tough ECB rhetoric to some extent which would curb Euro support.
The domestic developments remained of secondary importance with a 1.1% increase in Japanese retail sales in the year to March driven by higher energy prices. The Japanese markets will remain subdued in the short term with Tokyo closed for a holiday on Tuesday.
Risk appetite remained former on Monday with the Nikkei index at a two-month high. The dollar was again unable to make a serious challenge on resistance around 105.0 as exporter selling increased close to this level.
There were no major fresh incentives in New York with the dollar edging slightly lower to 104.30 as Euro/yen came under some selling pressure.
Sterling found support below the 1.98 against the dollar on Monday and strengthened to highs around 1.9950 during the day. The UK currency also found support just weaker than the 0.79 level against the Euro and strengthened to fresh three-week highs near 0.7835 before settling near 0.7855.
The latest Hometrack survey recorded an annual decline in house prices for the first time in two years which will reinforce housing fears, especially as there are still major stresses within the mortgage sector.
The UK currency will still gain some support from an increase in risk tolerances, especially with financial-sector fears at a reduced level, and there were also reports of merger-related support for the UK currency. Confidence in the economy as a whole remained weak and these underlying fears will limit the scope for Sterling gains.
The Swiss franc found support close to 1.62 against the Euro and consolidated around 1.6175 in New York trade. The dollar found support close to 1.03 against the franc, but was unable to make strong headway. Overall risk tolerances were still higher which tended to weaken the Swiss currency, but there was still some caution in extending carry trades.
According to Swiss National Bank member Jordan, the Swiss economy remains well positioned to weather the global downturn but faces considerable risks which need close monitoring.
Jordan also stated that the Swiss interest rates look appropriate for the foreseeable future. This will dampen any expectations of a near-term cut, although a majority of participants were already expecting rates to be left on hold.
The Australian dollar recovered ground in local trading on Monday. Commodity prices rallied from losses which helped underpin the Australian currency and overall risk tolerances remained stronger as Wall Street rallied.
The domestic influences were limited, but markets were still looking at the possibility of interest rates rising again later in the year which supported the currency. There will be Australian dollar buying support on dips given the degree of yield support, but the next risks suggest that the currency will struggle to make much headway.