by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar strengthened in early Europe on Tuesday with gains to just beyond 1.5550. The Euro recovered ground after the US data releases, but was unable to hold above the 1.56 level and drifted weaker later in New York.
The US data remained generally weak, but failed to have a major impact. The Case-Shiller 20-city house-price index recorded a 12.7% decline in prices in the year to February from a 10.7% drop previously, maintaining fears over the housing sector. Consumer confidence also remained at a depressed level of 62.3 for April from a revised 65.9 in March.
Markets were looking forward to the key events on Wednesday with forward and backward-looking indicators. The GDP data will provide the first estimate of the economy’s first-quarter performance and a negative figure would reinforce recession fears. The Federal Reserve will need to take a more forward-looking stance and asses whether there needs to be a pause in the process of cutting interest rates. Rising inflation fears will increase the pressure for cuts to be suspended.
There are likely to be divisions within the FOMC and some dissent is likely whatever the rate decision. Given the shift in interest rate expectations seen over the past week, the dollar is unlikely to make much further headway unless there is a clear hint that the Fed has switched to a more neutral policy.
The Euro-zone data will also remain a significant focus in the short term. On Tuesday, there was a sharp drop in reported French housing starts and Spanish retail sales which will reinforce fears over a sharp Euro-zone slowdown and this will pose a threat to the Euro.
The US currency dipped to lows near 104.00 in Asian trading on Tuesday, but was able to resist a further decline. Market activity was subdued with the dollar underpinned by gains in regional stock markets while there were no domestic incentives.
There has been further speculation over a one-off Chinese yuan revaluation which provided some degree of support to the Japanese currency, although the impact was limited.
The 105 region will remain an important short-term focus with exporter selling likely to increase near this level which will make it more difficult for the dollar to advance. The yen gained further support against the Euro which triggered a sharp dollar dip to 103.20 in New York before a rally to 104.00 later in New York.
Sterling dipped sharply against the dollar on Tuesday with a low below 1.97 in US trading. The UK currency also hit selling pressure close to 0.7825 against the Euro and weakened to lows around 0.7920.
Sterling was undermined by weak economic data during the day as the drop in mortgage approvals to a record low of 64,000 in March with an annual 40% decline increasing fears over the housing sector.
There were also increased fears over the outlook for consumer spending as there was a sharp deterioration in the CBI retail sales survey while participants were negative over May’s prospects.
MPC member Blanchflower stated that the economy was set to deteriorate further and he called for further interest rate cuts sooner rather than later. The impact will be offset to some extent by the fact that Blanchflower is the most dovish of the MPC members, but fears over the economy will still tend to undermine the UK currency.
The Swiss currency found support close to 1.62 against the Euro and strengthened sharply to highs near 1.61 before consolidating around 1.6150. The US currency was again unable to push above the 1.04 level against the franc.
The KOF leading index will be watched closely on Wednesday and a weak reading would reinforce expectations of a sharp slowdown in the economy.
The Swiss franc moves, however, are likely to remain dominated by the global market trends. A pessimistic Federal Reserve stance on Wednesday would tend to support the franc with a lack of enthusiasm for carry trades.
Source: VantagePoint Intermarket Analysis Software
The Australian dollar weakened to lows around 0.9320 with a firmer US dollar in early Europe on Tuesday enhancing the downward pressure. Domestically, there was a drop in the latest NAB business survey which will reinforce expectations of a significant slowdown and the domestic risks will be an important potential negative factor even though yield support will remain robust.
Gold prices dipped on Tuesday which temporarily pushed the Australian currency below the 0.93 level before a recovery. Volatility levels are liable to increase further on Wednesday.