by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to sustain a move through the 1.4750 level against the Euro on Tuesday and tested support levels near 1.4790, but the Euro was unable to challenge levels above 1.48. There was a growing mood of caution ahead of Wednesday’s key Federal Reserve interest rate decision, especially as there are also two important data releases during the day.
Tuesday’s US economic data was mixed, although there was some positive news on the industrial sector. Durable goods orders rose 5.2% in December after a 0.5% increase in November while there was a 2.9% increase for underlying orders.
The fourth-quarter GDP and ADP employment releases are due ahead of the Fed decision and a negative GDP reading would undermine dollar confidence running into the decision. There have been no comments from Fed officials and this will increase market speculation over a 0.50% rate cut, especially as the Fed will not want to destabilise markets with a surprise announcement. A further rate cut would reinforce the lack of yield support for the dollar, although there will be some support on hopes for a recovery in growth conditions with volatility a key risk.
Elsewhere, consumer confidence weakened to 87.9 in January from a revised 90.6 the previous month while there was a 7.7% drop in the Case-Shiller house-price index in the year to November. The combination of weak confidence and falling house prices will maintain fears over the consumer spending outlook.
French consumer confidence weakened sharply in the latest survey which will reinforce fears over a sharp slowdown in the economy and stifle aggressive Euro buying.
The dollar was unable to push above the 107.30 level against the yen on Tuesday, but was relatively firm as risk aversion eased slightly with a rally on Wall Street.
A rebound in the Nikkei index eased immediate defensive demand for the yen, although caution prevailed amid a general reluctance to maintain carry trades on a sustained basis.
The headline domestic economic data was stronger than expected with the headline unemployment rate at 3.8% for December while there was a 0.2% annual increase in retail sales. The underlying labour market was slightly weaker as the jobs/applicants ratio remained below the 1.00 level. Bank of Japan Governor Fukui stated that growth was generally slowing which maintained caution over the economy.
An aggressive Fed policy on Wednesday would tend to support interest in carry trades and curb yen demand on the crosses.
Sterling pushed to highs above 1.99 against the dollar on Tuesday, which was a four-week high for the UK currency, and there was buying support on dips. Sterling was unable to make a challenge on the 0.74 level against the Euro.
The latest CBI retail trade report recorded a decline to +4 in January from +8 the previous month, although there were expectations of an improvement in February which does not suggests that consumer spending is deteriorating rapidly.
The CBI still called for a cut in interest rates at the February meeting and suggested that policy would still be restrictive even after a cut.
The UK currency should still gain some support from unease over global growth trends while any sustained improvement in risk appetite would also be a positive influence.
The Swiss franc had a generally weaker tone on Tuesday as gains for global stock markets curbed currency demand. The Euro was, however, unable to sustain gains above 1.6150 against the franc while the dollar also hit selling pressure above the 1.0950 level. The franc will gain strong near-term support if the Fed decides against a further cut in interest rates on Wednesday.
The Swiss trade surplus fell to CHF198mn in December from CHF1.81bn the previous month as exports fell 3.4% over the year. The impact will be limited, but there is likely to be some speculation that weaker Euro-zone growth is undermining the Swiss export sector.
The Australian dollar challenged levels around 0.89 against the US currency on Tuesday before edging slightly weaker in US trading as markets became more cautious.
There was a small reduction in reported business confidence, although the domestic influences were limited. Speculation over a Reserve Bank interest rate increase next week is still providing underlying support. The currency was hampered by a fall in the local stock market even with regional market gains. Market volatility levels are liable to remain higher in the short term which will limit the scope for Australian dollar buying.