by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar pushed to high of 1.5720 against the Euro, but was unable to sustain the gains and weakened to re-test support levels weaker than 1.58 before consolidating around 1.5785.
The US ISM index for the manufacturing index edged stronger to 50.2 in June from 49.6 the previous month, in contrast to expectations for a small decline. The headline figure will offer some reassurance, but the underlying components were less favourable. The employment index weakened to the lowest level for five years while a rise in inventories will also cause concern.
Exports continue to provide strong support while the prices index rose to the highest level for over 10 years. Overall confidence in the US economy will remain fragile ahead of the key employment data later this week with markets less confident that the Fed will be able to increase interest rates.
A stronger than expected German retail sales report provided some relief to the Euro with a 1.3% monthly increase. There was also a larger than expected decline in German unemployment for the month. There will still be expectations of a slowdown while there will be major concerns over other Euro-zone economies.
There have been increased political protests against an ECB interest rate increase and these warnings are liable to continued over the next 36 hours. Any suggestion that the ECB mandate could be amended would be a very important negative influence for the currency. There will also be persistent fears over net capital outflows which will limit the scope for Euro gains.
The headline Japanese Tankan confidence index fell to +5 in the June quarter from +11 the previous quarter and this was the lowest figure since September 2003. The data will reinforce fears over the economy, especially as capital spending plans were weak, but the data was slightly stronger than expected and the downturn had been signalled by the monthly data.
Although overall confidence in the Japanese economy will remain fragile, the yen will still gain some defensive support on global doubts unless there is a sharp recovery in risk appetite and the dollar was unable to hold above the 106.20 level.
The US currency weakened as equity markets in Europe were subjected to significant selling pressure and dipped to lows around 105.20 before rebounding to 106.0 after the US data.
The UK currency pushed to highs near 0.7870 against the Euro on Tuesday before losing ground.
The latest Nationwide house-price index recorded a further 0.9% drop in prices for June to give a 6.3% annual decline, although this was marginally stronger than expected. The data will maintain fears over the UK housing sector which will curb short-term currency support.
The PMI index for the manufacturing sector also weakened sharply to 45.8 in June from a revised 49.5 previously which will increase wider fears over the economic trends. The UK currency retreated back to 0.7910 against the Euro and failed to hold gains to 2.00 against the dollar, but was still proving broadly resilient given the weak data releases.
The franc strengthened sharply in early US trading on Tuesday as equity markets came under selling pressure with gains to 1.0135 against the dollar and near 1.60 against the Euro. Equity markets rallied following the US PMI data which eased franc demand and it weakened back towards 1.02. The Swiss currency also retreated to 1.61 against the Euro.
The franc will continue to gain some support from an underlying decline in risk appetite with choppy trading conditions liable to persist in the short term.
The Swiss PMI index for June was little changed at 54.8 which should not have a significant short-term impact, although the index was at a 3-year low which will maintain expectations of an important slowdown in the economy.
As expected, the Reserve Bank left interest rates on hold at 7.25% following the latest council meeting. In the statement following the decision, the bank stated that demand was moderating and the bank appeared more confident that interest rates would not to need to increase again.
The statement helped push the currency weaker with the move amplified by the reported drop in car and home sales in the latest data. The decline will increase speculation over a sharp slowdown and the currency retreated back below 0.96 against the US dollar.
The Australian currency weakened further to lows of 0.9510 against the US currency in New York and a weak retail sales report on Wednesday would further undermine confidence.