by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar again tested support levels beyond 1.49 in European trading on Thursday while the Euro was again unable to hold above this level. The US currency strengthened to highs around 1.48 before consolidating around 1.4840. The Euro weakened slightly as risk aversion increased, but the dollar was still struggling to secure significant buying support as sentiment remained weak.
US jobless claims rose sharply to 375,000 in the latest week from a revised 306,000 previously. The sharp increase probably reflected a correction from recently surprisingly low figures, but the big increase will create some unease over Friday’s payroll report. The Chicago PMI index fell to 51.5 in January from 56.6 previously.
A very weak reading for the employment data on Friday would maintain a lack of confidence in the US economy and reinforce speculation that the Federal Reserve will have to cut interest rates again. To some extent US currency moves are liable to remain counter-intuitive as weak data will also increase global growth fears and provide dollar support.
The core PCE price index rose 0.2% in December with the annual rate of 2.2% still above the unofficial Fed ceiling of 2.0%. The Fed has, however, made it clear that inflation indicators will remain of secondary importance in the short term.
German retail sales recorded a further 0.1% decline for December to give a 6.9% annual decline while there were further declines in the Euro-zone confidence indicators. The consumer inflation rate increased to 3.2% in January from 3.1% previously.
The data illustrates the difficulties faced by the ECB with persistent inflation fears at a time of faltering growth. If growth fears increase, the Euro will not be in as favourable position to secure support from a firm ECB policy stance.
Bank of Japan member Nishimura hinted that the bank could consider a cut in interest rates as the economy weakens and this unsettled the yen in Asian trading, but the dollar was unable to regain the 107.0 level.
The yen strengthened to test levels beyond 106 against the US currency in early US trading on Thursday as equity prices came under pressure. There was also speculation that domestic funds had completed month-end overseas bond buying which curbed selling pressure on the Japanese currency.
Choppy trading conditions persisted as the yen weakened back to around 106.40 in New York. The overall evidence suggest the yen is in a consolidation phase after rapid gains seen during January as a whole.
Sterling found support below 1.9840 against the dollar on Thursday and pushed higher over the day. The UK currency again hit tough resistance in the 1.9940 region and settled close to 1.99. Sterling found support close to 0.7480 against the Euro.
The Nationwide Bank reported that house prices fell 0.1% in January to give a 4.2% annual increase which was the third successive monthly decline. Thedata will, however, ease fears that the UK economy is deteriorating rapidly which should provide some degree of protection, especially after weak German retail data.
Consumer confidence edged stronger to -13 in January from -14, although this was still at historically depressed levels. The PMI report will be watched closely on Friday and any increase from December’s level would provide additional Sterling support.
The franc strengthened to record highs against the dollar on Thursday with a high near 1.0750 before a correction back to 1.0820. The franc also strengthened to highs beyond 1.6050 against the Euro.
The Swiss currency continued to gain support from elevated levels of risk aversion during the day, although there wee several changes in direction as stock market trends shifted.
National Bank member Jordan stated that there was no need for lower interest rates now, but speculation over a cut will increase if there is a sharp downturn in Friday’s PMI report.
The Australian dollar failed to hold the gains and weakened back towards the 0.89 level. The domestic influences were mixed with stronger credit growth for December offset by a drop in new home sales.
International conditions will remain very important and the underlying fears over US and global growth trends will tend to undermine the Australian dollar. The currency will, however, gain support from the improved yield differentials. Choppy trading conditions are liable to prevail as the conflicting forces battle for supremacy and the Australian dollar pushed stronger to 0.8960 in US trading.