by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar advanced strongly in European trading on Thursday with a peak close to the 1.55 level against the Euro.
The Euro-zone PMI index for the services sector dipped to 51.6 for March from a provisional 51.7 with the Spanish index at a record low close to 40.0. There was also a 0.5% monthly drop in Euro-zone retail sales for February which will maintain expectations that the economy is slowing sharply. There will be increased pressure for a policy shift by the ECB if growth conditions continue to deteriorate.
The US data was mixed and had a net negative impact on the UIS currency. Initial jobless claims rose strongly to 407,000 in the latest week from a revised 369,000 the previous week which increased fears over the US labour market. The claims data will certainly restrain optimism ahead of Friday’s payroll report which will inevitably be very important for interest rate expectations and near-term dollar direction.
In contrast, the PMI index for the services sector rose slightly to 49.6 from 49.3 the previous month. Although still below the 50.0 threshold, the data will provide some optimism that further major near-term deterioration can be avoided, especially as the fiscal and monetary actions will not yet have had any significant impact. Markets were still leaning towards a 0.25% at the next Fed meeting rather than a 0.50% move.
The dollar retreated back towards the 1.5680 level following the US data releases with evidence of strong Euro buying close to the 1.55 level.
The domestic influences were limited on Thursday as international perceptions of credit and recession risk dominated markets. Overall fear over financial markets has eased and this is continuing to promote increased capital outflows from Japan.
The latest capital account evidence also suggests that funds are cautious over Japanese prospects with net outflows from the local market. In this environment, overall yen demand has weakened, at least on a short-term view.
The dollar was able to find support around the 102.20 level in Asian trading on Thursday as the Nikkei index was able to secure a modest advance while Asian markets generally edged stronger. The dollar extended gains to 102.95 before retreating sharply after the jobless claims data. Volatility is likely to be high again after the monthly payroll report on Friday.
Sterling resisted a renewed decline through the 0.79 level against the Euro on Thursday and strengthened to a high of 0.7825 before consolidating around 0.7855. Sterling dipped to lows near 1.9750 against the dollar after the UK data before pushing back above the 1.99 level.
The UK PMI index for the services dipped to 52.1 in March from 54.0 previously which suggests a significant slowdown in the economy as business confidence deteriorated. The latest quarterly Bank of England survey also warned over a further tightening of credit conditions during the second quarter while corporate failures had increased.
Underlying fears over the housing sector and wider economy will continue to undermine confidence in the UK currency, especially as there will be additional pressure on the Bank of England to cut interest rates next week.
Sterling will still some support if conditions within financial markets continue to improve and doubts over the Euro-zone will also provide a degree of protection.
The franc dipped sharply to lows near 1.0220 against the dollar before correcting back to 1.01 after the weak US labour-market data. The franc also found further support weaker than the 1.5850 level against the Euro.
The Swiss inflation data will be monitored on Friday, although the data is unlikely to have a significant near-term impact on the National Bank’s interest rate policy.
There will be further unease over the Swiss banking sector which is likely to have some negative impact on the franc, although the effect should be measured at this stage unless there is prominent banking collapse.
The Australian dollar has secured net gains over the past 24 hours, but has still faced tough resistance. Increased confidence in international risk has supported demand for the currency, especially with equity prices able to rally. Commodity prices also regained some ground which provided support.
The domestic influences have remained limited, but the retail sales data will be watched closely on Friday for evidence on the local economy. Any sign of weakness would reinforce fears that the economy is starting to deteriorate and this would also reinforce expectations that interest rates have peaked. The Australian currency consolidated around the 0.9150 level in US trading.