by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The Euro was unable to hold support close to 1.4590 against the dollar on Thursday and weakened to around 1.4560 ahead of the ECB decision.
At the latest council meeting the ECB held interest rates steady at 4.00%. In the press conference following the meeting, ECB President Trichet still voiced serious concern over inflation trends. The inflation risks were, however, also described as more short term in nature than in previous meetings while Trichet stated that there were important downside risks to the economy.
He also referred to the fact that there were no calls for rates to be increased or cut at the meeting. These remarks suggest that that the ECB has shifted to a neutral policy from a tightening bias. Given the adjustment, there will be further market speculation that the bank will continue to shift towards an easing bias and look for a cut in interest rates during the second quarter.
This change in sentiment will tend to undermine the Euro, although market expectations have already adjusted which should limit selling pressure. The Euro still weakened to lows around 1.4450 in US trade.
US jobless claims fell to 356,000 in the latest week from a revised 378,000 the previous week while pending home sales fell 1.5% in December to give a 24.2% annual decline. The data will reinforce inflation fears, especially as continuing jobless claims were at a 30-month high.
The dollar gained some support on defensive grounds as confidence in global growth conditions continued remained very fragile. There were persistent fears that the credit difficulties would intensify.
Activity in Asian trading on Thursday was stifled by a series of holidays in regional markets. A lack of confidence in global stock markets was providing underlying yen support and the dollar was unable to make any significant challenge on levels above the 107.0 level.
Bank of Japan officials were generally cautious in comments on Thursday, but with some optimism that the slowdown in the economy would be only temporary.
The yen gained some further ground in European trading as risk aversion increased with particular gains on the crosses. These gains were not sustained and the Japanese currency weakened rapidly to lows near 107.80 against the US dollar in New York.
Sterling drifted weakened ahead of the Bank of England interest rate decision on Thursday with a dip to around 1.9520 against the dollar while the UK currency also tested 0.75 against the Euro.
As expected, the Bank of England cut interest rates by 0.25% following the latest MPC meeting. The vote split will not be known until the minutes are released in two week’s time.
In the statement following the decision, the bank referred to a tightening of credit conditions and a slowdown in consumer spending. The MPC also warned over the inflation risks with a particular concern that rising energy and food prices could push inflation up sharply. The statement illustrates the fact that the bank would like to cut rates gradually to control inflation, but the markets will not be convinced that this will be sustainable if there is evidence of a further deterioration in the economy.
UK industrial production fell 0.1% in December with a 0.2% decline in manufacturing output which was weaker than expected and will maintain concerns over the economic outlook.
Sterling weakened further to below 1.94 against the dollar in US trading as the US currency pushed stronger, but reversed losses against the Euro.
The Swiss currency tested levels beyond 1.60 against the Euro on Thursday as risk tolerances remained lower due to persistent unease over global credit conditions. The franc weakened to lows near 1.11 against the US dollar in New York as the US currency rallied strongly before recovering back to 1.1040.
The franc initially gained support on safe-haven grounds before reversing as Wall Street attempted to stabilise and Treasury bond yields increased.
Domestically, seasonally-adjusted unemployment was steady at 2.6% for January which did not have a significant impact.
The Australian dollar re-tested lows near 0.89 against the US dollar in local trading on Thursday with the currency unable to regain the 0.90 level. There were no major domestic trends with the Australian currency unsettled by persistent credit-related fears as stock markets were generally weaker.
The lunar holiday in much of Asia dampened activity to some extent. Yield support will battle with global fears in the short term. An easing of fear allowed the Australian dollar to stabilise and find buying support on the crosses.