by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The Euro was unable to make a fresh challenge on the 1.4750 level on Wednesday and weakened to lows around 1.4615 after the US data releases.
US consumer prices rose by more than expected for January with a 0.4% headline increase as food and energy prices continued to rise strongly with an annual 4.3% rate. There was also a 0.3% rise in core prices which pushed the annual rate back to a 12-month high of 2.5%. The higher inflation data will act as a restraint on aggressive Federal Reserve policies.
The housing data was close to expectations with starts little changed at an annual rate of 1.01mn while permits weakened slightly to 1.05mn. There will, however, be some relief that there was no further deterioration as this could indicate that the sector is reaching a trough.
The FOMC minutes from January’s meeting stated that there were downside risk to growth and that relatively low interest rates would be needed for a time. The Fed downgraded its 2008 GDP growth forecasts and pushed the unemployment forecasts higher. The minutes also warned that rate cuts may need to be reversed quickly once the economy stabilises. The comments on medium-term trends should offer some near-term dollar protection.
The Euro was initially undermined by remarks from the German Finance Ministry that the state-backed Landesbank sector was in crisis. The Euro regained ground in New York with a fresh challenge on levels above 1.47 and uncertain trading conditions are liable to persist in the short term.
The yen strengthened to 107.50 against the dollar in early Europe on Wednesday, but was unable to sustain the gains and weakened back to 108.20 in US trading while there were renewed losses against the Euro.
Confidence in the Japanese economy remains frail with the Bank of Japan’s minutes from January’s meeting stating that the central bank was wary of downside risks. This caution will reinforce speculation that the bank will not be in a position to increase interest rates over the next few months and could still have to consider a rate cut.
The yen will also tend to lose ground to the high-yield currencies if there is a sustained rally in commodity prices. Caution over the global economy is likely to keep Japanese currency selling in check, especially given the persistent credit fears.
Sterling remained on the defensive against the Euro during Wednesday and was unable to sustain a move back through 0.7550. Sterling also dipped to a four-week low against the dollar near 1.9350 before pushing back to 1.9430.
The MPC minutes from February recorded a 8-1 vote for a 0.25% cut in interest rates with Blanchflower voting for a larger 0.50% cut as a precaution against a severe deterioration in the economy. The majority view will maintain expectations of a cautious policy which will tend to curb short-term selling pressure on the UK currency if the growth data holds firm.
Wednesday’s data provided some relief with the CBI industrial survey edging higher to +3 for February from +2 the previous month while there was a strong surplus for government borrowing in the latest month.
There will, however, still be serious unease over economic conditions and the retail sales data will be watched closely on Thursday. A second successive monthly decline in sales would seriously erode confidence.
The dollar found firm support on dips towards the 1.09 level against the franc on Wednesday and tested levels above 1.10 in New York before settling around 1.0990. The Swiss currency weakened to around 1.6170 against the Euro with sharp selling pressure in late Europe.
The Swiss National Bank maintained its recent forecast that GDP growth will be around the 2.0% level during 2008, although markets are liable to be less confident over the outlook which will curb franc buying support.
Any sustained improvement in risk appetite would also curb near-term currency demand, although caution will inevitably prevail at this stage.
The Australian dollar edged lower in local trading on Wednesday with a dip to near 0.9150 against the US dollar. Domestically, the latest wages data was close to expectations with a 4.2% increase in the year to the fourth quarter which encouraged some profit taking after recent strong gains.
The Australian dollar was also unsettled by sustained caution over global credit conditions. There will be near-term currency support from high commodity prices, although this trend may be difficult to sustain given the global growth fears. The currency settled close to 0.9170 as the US currency failed to hold gains.