by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar was again unable to break back through the 1.4750 level against the Euro ahead of the Federal Reserve interest rate decision on Wednesday and weakened to test support levels beyond 1.48. The trade-weighted index also weakened to a two-week low.
Following the latest FOMC meeting, the Federal Reserve cut interest rates by a further 0.50% to 3.00% with the discount rates also reduced by 0.50%. The Fed stated that there were downside risks to the economy while credit conditions had tightened and that the housing correction had deepened. The Fed also cited evidence of a weaker labour market for the further reduction in rates. There was a 9-1 vote with Fisher calling for unchanged rates. Following the cut, the dollar weakened to lows around 1.49 against the Euro.
The advance fourth-quarter GDP report recorded a sharp slowdown in growth to an annualised 0.6% for the fourth quarter from 4.9% previously. Consumer spending held relatively firm while there was a further sharp contraction in housing.
The ADP employment report was more positive as it recorded an increase in jobs of 130,000 for January after a revised 37,000 increase the previous month. Such an increase would be consistent with non-farm payroll growth in the region of 155,000 which should help ease immediate fears over the labour market.
The dollar will, however, remain vulnerable on yield grounds in the short term, especially as the generally downbeat Fed assessment will maintain expectations of further cuts. The prospect for investment inflows should alleviate the pressure to some extent.
The Euro-zone retail PMI index recorded a fragile recovery for December. The German retail sales report and Euro-zone confidence indicators will be watched closely on Thursday for further evidence on growth trends.
Yen
The yen was unable to strengthen through the 106.50 level against the dollar on Wednesday and weakened to test support levels near 107.20.
There was some evidence that Japanese investment trusts were allocating funds into overseas funds at the end of the month which undermined the Japanese currency.
Domestically, there was a 1.4% industrial production increase for December with a 0.7% annual increase. This was slightly below market expectations, although the impact was limited as market attention is fixed on the international developments.
Following the Federal Reserve interest rate decision, the dollar initially held firm against the yen as equity markets attempted to rally. The US currency was unable to sustain a move above 107.30 and weakened to 106.60 as Wall Street retreated.
Sterling
Sterling was unable to sustain gains above the 1.99 level against the dollar and edged lower against the Euro ahead of the Fed interest rate decision.
There was a drop in mortgage approvals to 73,000 in December from a revised 81,000 the previous month which will maintain fears over the housing sector. The latest consumer credit growth data was also weak, but net lending data was stronger than expected. There will continue to be strong expectations of an interest rate cut at February’s MPC meeting, but yield support over the dollar has continued to improve.
Bank of England Governor King has been nominated for a second term which will provide some slight degree of Sterling support. The US developments remained crucial in New York and the Fed interest rate reduction pushed Sterling back above 1.99 against the dollar with the UK currency losing ground against the Euro.
Swiss franc
The dollar found initial support below the 1.09 level against the franc, but struggled to make any significant headway while the franc edged weaker against the Euro. The Swiss currency strengthened back to test record highs near 1.0850 after the Fed rate cut.
The KOF leading index weakened to 1.70 in January from a revised 1.84 the previous month and this was the lowest reading for nearly two years. The data, following on from weaker export data reported yesterday, will increase fears over a significant slowdown in the Swiss economy.
The immediate implications should be limited with the National Bank holding interest rates steady, but sentiment is liable to weaken to some extent.
Source: VantagePoint Software, Market Technologies, LLC
Australian dollar
The Australian dollar tested resistance levels near 0.89 against the US currency during local trading on Wednesday. A small declines in stock markets helping to weaken the currency slightly towards 0.8875 in early Europe, but selling pressure was contained.
There were no significant domestic developments with attention fixed firmly on global trends. The Federal Reserve interest rate cut propelled the Australian currency to highs above 0.8950 as additional yield support was compounded by increased interest in carry trades as equity markets rallied.
