by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar found support close to 1.4760 on Wednesday and strengthened to highs around 1.4660 in US trading before encountering fresh resistance. The US data helped ease pessimism over the economy to some extent which underpinned the US currency and there were gains to new highs near 1.4610 later in New York.
The ISM index for the services sector fell to 54.1 in November from 55.8 the previous month. The employment index was close to the 50.0 expansion threshold, although there was a much stronger than expected reading for the prices component in the index. Inflation fears will be offset to some extent by an upward revision to third-quarter productivity growth which pushed unit labour costs down.
The ADP employment report was substantially stronger than expected with an increase of 189,000 for November after an upwardly-revised 119,000 increase the previous month. Monthly data will remain volatile and other evidence has not suggested a strong labour market, but the data is likely to dampen speculation that the Fed will act aggressively to cutinterest ratesby 0.50% this month.
The focus will tend to switch back towards the Euro on Thursday with the monthly ECB interest rate decision. Given conflicting inflation and growth pressures, there is a strong probability that rates will be left unchanged, although there has been some market speculation that there could be a rate cut. Growth warnings from President Trichet or strong protests against currency strength in the statement following the decision would undermine the Euro.
The yen was unable to sustain gains through the 110.0 level against the dollar on Wednesday and weakened to lows near 111.0 in New York after depreciating steadily. The US currency hit tough resistance close to 111.0 and weakened back towards 110.50 in choppy trading.
Speculation over further Chinese monetary tightening or a widening of the currency band should provide some yen protection in the short term, especially as underlying credit-related fears will persist.
Sterling weakened further against the Euro on Wednesday, dipping to the lowest levels since mid 2003 at near 0.7230. The UK currency also fell sharply against the dollar with lows near 2.0250 after a series of weak data releases.
The Nationwide consumer confidence index dropped sharply in November to 86 from 98 previously which reinforced growth fears. The Halifax house price index also reported a further 1.1% drop in house prices for November, the third successive decline, which maintained negative sentiment towards the housing sector.
The PMI report for the services sector fell to 51.9 from 53.1 the previous month. This data will be particularly important as MPC members have stated that survey evidence will be a key factor in determining near-term policy decisions. The weaker result will increase pressure for interest rates to be cut, although there will still be concerns over the inflation data within the survey.
Thursday’s MPC interest rate decision will still be very close with a split vote likely, but the balance has swung towards a rate cut. A reduction would hurt Sterling, although the impact should now be more measured given that expectations have already shifted towards expecting a cut over the past 24 hours.
The dollar found support close to 1.1150 against the franc on Wednesday and pushed back to highs around 1.1280. The Swiss currency again found support weaker than the 1.65 level against the Euro with narrower ranges than on Tuesday.
A slight easing of risk aversion will tend to curb immediate franc demand, although underlying caution is still likely to prevail which will prevent strong selling pressure on the Swiss currency.
The Reserve Bank of Australia left interest rates unchanged at 6.75% and there were some warnings over inflation in a surprise statement, but the bank also expressed doubts over growth trends with reduced confidence in 2008 prospects. Markets are now less confident that interest rates will be increased again next year which dampened Australian dollar sentiment. Third-quarter GDP growth of 1.0% was in line with market expectations.
The currency will also be unsettled by underlying risk aversion even though there was some stabilisation in stock markets. The Australian currency was trapped close to the 0.87 level against the US dollar despite New Zealand dollar strength.