by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar pushed to highs around 1.5520 against the Euro after the slightly firmer than expected US data before drifting back to 1.5570 ahead of the FOMC decision.
The advance report for first-quarter GDP recorded growth at a 0.6% annualised rate compared with an expected 0.2%. There was a further sharp decline in housing investment and business spending also fell. Consumer spending growth was weak at 1.0% while there was a boost from exports.
The ADP report recorded a private-sector employment increase of 10,000 for April compared with expectations of a decline of around 60,000 which is likely to lead to some upward revision of Friday’s payroll estimates.
The Federal Reserve cut the Fed Funds rate by a further 0.25% to 2.00% following the FOMC meeting. There was an 8-2 vote for the decision with Plosser and Fisher voting for no change. In the statement, the Fed dropped the reference to downside growth risks and effectively switched to a more neutral policy.
This had already been priced in which prevented the dollar from securing any fresh buying support and it retreated back to beyond 1.56, but should offer some protection over the next few weeks.
The Euro-zone data continued to indicate a significant slowdown with a drop in business confidence for April while there was also evidence that the German labour market is weakening with only a small unemployment drop for April.
Euro-zone consumer inflation fell to a provisional 3.3% in April from a 3.6% the previous month. Following the weaker than expected German inflation data, there will be greater confidence that inflation has peaked. With evidence of weaker growth, there is likely to be a slightly softer stance from the ECB with markets again speculating over a cut in rates over the second half of the year which will curb Euro support.
As expected, the Bank of Japan left interest rates on hold at 0.50% following the latest monetary meeting. There was a drop in the headline unemployment rate for March, but the data tone as a whole was weak. Industrial production fell sharply by 3.1% in March as US demand weakened while there was also a drop in household spending.
The Bank of Japan was very cautious over the outlook in its monthly survey which will tend to unsettle the yen, especially as any reference to higher interest rates was removed.
The yen was still being influenced by global trends and some further buying support against the Euro supported the Japanese currency. The dollar briefly advanced to 104.85 before retreating to test levels below 104.00 after the Fed rate decision.
Sterling fell to lows around 1.9620 against the dollar on Wednesday after the weak UK housing data, but then rallied strongly to highs near 1.99. The UK currency also strengthened to near 0.7850 against the Euro from lows near 0.7950. Some boost to risk appetite underpinned the UK currency.
The Nationwide Bank recorded a 1.0% drop in house prices in the year to April. Consumer confidence also continued to deteriorate according to the latest Gfk survey and this combination will reinforce fears over spending levels and recession.
The PMI index for the manufacturing sector will be watched closely on Thursday and Sterling will be vulnerable if there is a drop to below the 50.0 level.
The dollar found support above the 1.03 level against the Swiss franc on Wednesday and probed levels above 1.04 after the US data releases as there was a recovery in risk appetite. The franc also weakened to beyond 1.62 against the Euro.
The Swiss KOF index weakened further to 1.20 in April from a revised 1.40 the previous month. There has been a sharp decline over the past six months and this was the weakest reading since late 2004 which will reinforce speculation that the economy is slowing rapidly.
There is likely to be some renewed speculation over an interest rate cut during the third quarter of 2008 which will tend to weaken the franc, but it regained some ground following the Fed rate decision.
Source: VantagePoint Intermarket Analysis Software
There were no significant domestic influences on Wednesday with caution a key focus ahead of the Federal Reserve interest rate decision. The Australian dollar drew some support from a tentative rally in commodity prices during the day and was able to hold above the 0.93 level against the US currency.
A recovery in risk appetite following the US GDP data helped push the Australian currency to highs above 0.9400 in New York trade with a peak close to 0.9470 as the US currency retreated.