by Darrell Jobman, Editor-in-Chief


The Europushed stronger in early Europe on Thursday with a move towards 1.5470 and there was then a period of consolidationahead of the European interest ratedecisions. As expected, the ECB left interest rates unchanged at 4.25% following the latest council meeting.

In the press conference following the decision, ECB President Trichet continued to warn over inflation threat with increased medium-term risks while the bank’s mandate was solely to maintain price stability. Trichet also warned over the growth outlook by stating that there had been a substantial slowdown around the middle of the year.

Although the headlines were still relatively neutral, Trichet’s comments are liable to reinforce market speculation that the ECB made a mistake in raising interest rates in July. There will be expectations that the bank will start to reverse policy during the third quarter, although the bank will be very cautious.

The US data was mixed during the day and added to uncertainty over trends. Initial jobless claims rose further to 455,000 in the latest week from 448,000 the previous month, but the data is again liable to have been distorted by the recent changes in eligibility criteria.

In contrast, pending home sales rose by 5.3% in June after a revised 4.9% decline the previous month which will raise some optimism that the housing sector is close to a low point.

A key feature is still that markets are more concerned with European economic risks and this is continuing to underpin the dollar. The US currencypushed to 7-week highs near the pivotal 1.53 level in US trading and any break below this region would reinforce negative Euro sentiment. On a trade-weighted basis, the dollar pushed to the highest level since February.

Source: VantagePoint Intermarket Analysis Software


The dollar was pegged back after the Wall Streetclose on Wednesday by wider than expected losses at insurance group AIGwhich revived fears over global credit and financialconditions.

Domestically, there was a smaller than expected decline in machinery orders of 2.6% for June and there was a small quarterly increase compared with expectations of a decline. Nevertheless, overall confidence in the economy will remain weak, especially as officials have now downgraded their outlook for the economy with further recessionwarnings.

The yen was unable to secure more than limited relief on Friday and was holding around 109.50 against the dollar. The Japanese held steady in US trading despite dollar strength and recovered ground against the Euro to 167.70 following an earlier dip to 169.50.


Confidence surrounding the UK economy remained weak on Thursday as the Halifax Bank reported a further 1.7% decline in house pricesfor July. There was an 8.8% annual decline which was the weakest annual outcome for over 15 years and Sterling weakened to lows near 0.7940 against the Euro.

The bank of Englandleft interest rates unchanged at 5.0% following the latest MPC meeting. There was no statement by the bank and the vote split will not be known until the minutes are released in two weeks time.

Given evidence of further deterioration in the economy, there has been increased speculation that the bank will move to cut rates by the end of 2008. These expectations will intensify if crude oil pricescontinue to decline. In this context, the consumer inflationdata and Bank of England inflation report will be watched very closely next week.

The UK currency recovered to 0.7885 against the Euro as the Euro came under heavy pressure, but Sterling was trapped at an 8-week low against the dollar near 1.9430.

Swiss Franc

The Swiss currency took advantage of Euro vulnerability on Thursday and edged stronger to 1.6275 in US trading. The franc was unable to regain the 1.05 level against the franc and pushed to fresh 8-week highs around 1.0630 before consolidating.

Overall confidence in the European economy is continuing to weaken and this will unsettle the franc even if Euro-zone fears continue to offer some protection against the Euro.

Source: VantagePoint Intermarket Analysis Software

Australian dollar

The latest labour-market data provided some degree of relief with an employment increase of 10,000 for the month, although the unemployment rate was higher than expected at 4.3%. In response, the Australian dollar recovered back to 0.9130 against the US currency.

Rallies are still liable to be sold into quickly given that confidence has deteriorated with speculation over a move towards lower official interest rates within the next two Reserve Bank meetings. Wider US currency strength pushed the Australian currency to lows near 0.9050 in UStrading.