by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar probed levels below 1.46 against the Euro in early Europe on Wednesday, but was unable to sustain the gains and weakened back to trade within a 1.46-1.4650 range. The dollar was over-bought after the strong gains seen over the previous 24 hours and this made it more difficult to break important resistance levels below 1.46.
The ECB interest rate decision and statement will be very important for the markets on Thursday. The Euro will move very sharply if interest rates are changed, but a steady policy is the most likely outcome in which case the statement following the decision will be watched very closely.
A more moderate stance from President Trichet would increase market speculation that the bank is shifting towards a cut in interest rates which would tend to undermine the Euro. The ECB will want to maintain a tough stance on inflation, but the Euro will not gain support from a firm approach if growth indicators appear to be deteriorating further.
The US productivity growth was stronger than expected for the fourth quarter which produced a smaller than expected drop in unit labour costs, but the impact will be limited as the Federal Reserve and markets are not concentrating on the inflation risks. The Fed will still need to be careful as a loss of credibility would have important negative medium-term implications. Fed Governor Plosser stated on Wednesday that sharp interest rate cuts were appropriate, but that the Fed would need to be aware of inflation risks.
Yen
The sharp decline in global stock markets underpinned the yen in Asia on Wednesday with the Japanese currency strengthening to highs around 106.20 against the dollar.
Fears over the US and Euro-zone prospects will also improve Japan’s relative position which will tend to support the yen, especially as capital repatriation is liable to increase. The yen was, however, unable to strengthen through the 106.0 level and weakened back to 106.60 in New York.
The G7 stance on exchange rates will continue to be monitored closely ahead of weekend meetings as sustained pressure for stronger Asian currencies would provide underlying support to the yen. In comments on Wednesday, a Finance Ministry official suggested that G7 won’t single out currencies and there is likely to be Japanese resistance to any rapid yen advance from current levels.
Sterling
Sterling dipped to lows around 1.9550 against the dollar on Wednesday before a limited recovery with fluctuations around 1.96 in US trading. Sterling was trapped close to 0.7460 against the Euro during the day as markets awaited the Thursday Bank of England decision.
There was a further decline in consumer confidence to the lowest level since the survey was launched in 1994 according to the latest Nationwide survey while the latest KPMG survey suggested that earnings pressures were easing.
There is a very strong probability that the Bank of England will cut interest rates by a further 0.25% this month. Any decision to hold rates steady could boost Sterling initially, but sentiment could turn quickly on fears that growth will be severely damaged.
Swiss franc
The dollar was unable to sustain a brief move to above the 1.10 level against the franc on Wednesday and settled around 1.0975 in more cautious conditions following the large moves on Tuesday. The Euro found some further support close to 1.6030.
The franc lost some support as equity markets attempted to rally, but the underlying lack of confidence in growth prospects, allied with persistent fears over credit conditions, prevented any significant selling on the currency.
Any evidence of a switch to a less restrictive ECB stance on Thursday would tend to weaken the franc against the dollar.
Source: VantagePoint Software, Market Technologies, LLC
Australian dollar
The Australian dollar dipped to lows near the 0.89 level against the US dollar on Wednesday before pushing back to 0.8980 in US trading. Choppy conditions are liable to persist in the short term as the global growth conditions remain a key market focus.
The Australian yield support will remain intact, but there will be increased concerns over the global economy following depressed US and Euro-zone readings. In this environment, demand for the Australian dollar is likely to remain subdued, especially with fears that commodity prices will be subjected to sustained selling pressure.
