by Darrell Jobman, Editor-in-Chief TraderPlanet.com
Consolidation was a dominant theme on Friday following the substantial Euro losses seen over the previous few days and especially on Thursday. The Euro found support close to 1.4450 against the dollar, but was struggling to break back above the 1.4520 resistance level. Sentiment was still being undermined by speculation that the ECB will cut interest rates during the second quarter.
There were no major data releases and the comments from Fed officials will continue to be watched very closely in the short term. Fed Governor Yellen stated on Friday that she was not confident that the US could avoid recession. Remarks from voting members will be watched closely as markets look to assess whether the Fed wants to send a signal over a pause in rate cuts. In this context, the testimony from Fed Chairman Bernanke next Thursday will be very important for market sentiment.
The German trade surplus declined to EUR10.8bn in December from EUR19.5bn the previous month which will cause some concern over export trends as there was a monthly decline in shipments. There was a rebound in German industrial production, although the annual growth rate slowed slightly.
The dollar was being hampered by increased exporter selling towards the 108.0 region in Asian trading on Friday, but held above 107.30.
The Japanese economic data was weaker than expected with a 3.2% December fall in core machinery orders which gave a 3.3% annual decline. There will be further concerns that Japanese economic conditions are deteriorating.
Given the economic vulnerability, Japanese officials will be wary of further yen appreciation and comments from the Finance Ministry will be watched closely at the weekend G7 meetings. Even with European concerns, G7 members are likely to focus on measures to support credit markets and minimise recession risks rather than address exchange rates.
A lack of rhetoric would tend to weaken the yen slightly next week. The yen was confined to narrow ranges over the remainder of Friday as activity slowed.
The UK inflation evidence will be watched closely next week to assess the scope for flexibility on interest rates. If there is higher consumer prices data and more serious inflation warnings in the quarterly inflation report, the Bank of England will continue to oppose rapid cuts in interest rates.
There will be additional pressure on the central bank to cuts rates aggressively if there is evidence of serious economic deterioration. There was a reported increase in housing repossessions during 2007, although the total was slightly below the expected level.
The Bank of England stated that it would not shift policy to announce the vote split with the MPC announcements.
The Swiss currency found support close to 1.11 against the dollar on Friday and strengthened back to 1.1040 in New York. The franc fluctuated around the 1.60 level against the Euro.
The KOF institute warned that Swiss GDP growth was liable to slow during 2008, although forecasts were not downgraded aggressively. Wider fears over the European economy will have some negative impact on the Swiss currency.
Consumer prices rose 2.4% in the year to January compared with expectations of a 2.2% annual rate which will dampen expectations of lower interest rates.
The Australian dollar was unable to strengthen back above the 0.90 level against the US dollar, but held firm on the crosses.
General US currency strength stifled Australian dollar gains, although the local currency held relatively firm. Yield support will remain intact in the short term, especially as Australia is the only major economy where the central bank still has a tightening bias.
The Australian dollar secured support from the strength of commodity prices on Friday and settled close to 0.8955. There will, however, still be further unease over global growth conditions which will curb strong demand for the currency.