by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar re-tested support levels beyond the 1.38 level against the Euro on Monday, but the Euro was again unable to hold above this level and drifted back to 1.3780 later in US trading.
There will be some pressure for market consolidation ahead of the US consumer inflation data and testimony from Fed Chairman Bernanke on Wednesday. In this environment, there should be some short-term easing of dollar selling pressure.
The New York manufacturing survey reported an increase to 26.5 in July from 25.8 in June, the highest reading for 13 months. The firm data will maintain near-term confidence in the manufacturing sector, although the national implications may be limited, especially with concern over consumer spending levels.
The renewed increase in long speculative Euro IMM contracts to above the 100,000 level will maintain the risk of a Euro correction weaker. French President Sarkozy attempted to sidestep the strong Euro issue to some extent on Monday, concentrating on currency weakness elsewhere, but markets will still need to be on alert for increased tensions between Germany and France over exchange rate policy.
There is a risk that underlying economic divisions within the Euro-zone economies will start to become a more serious market factor and, in this context, the German ZEW index will be watched closely on Tuesday.
The yen pushed to 121.55 against the dollar on Monday, but was unable to hold the gains and weakened back to near 122.0 in US trading with evidence of dollar selling above this level.
There were no significant domestic market developments on Monday with Japanese markets closed. Reports of an earthquake in Japan had a small negative yen impact, but the currency overall was able to hold ground with greater caution over aggressive yen selling.
Carry trades will remain dominant in the short term and further strength in global stock markets would continue to encourage a flow of funds out of Japan. Overall volatility levels are liable to increase given that capital flows are liable to be increasingly unstable.
Sterling pushed to a fresh 26-year high against the US dollar during Monday with a high just above the 2.04 level before a small technical correction weaker. The UK currency pushed back to 0.6765 against the Euro.
Evidence of weaker growth data and diminishing inflation would increase pressure for an extended Bank of England pause in interest rates and sap Sterling strength, particularly as markets are looking for an increase in rates to at least 6.0%. Stronger growth and inflation figures would create additional pressure for an early move to increase interest rates again which would fuel additional flows into the UK currency.
The first data release is consumer prices on Tuesday with markets expecting a decline in the headline rate to 2.3% from 2.5%.
Confidence in the UK economy is liable to be undermined slightly by the increase in corporate profit warnings to a six-year high.
Wider carry trade influences will remain very strong with the UK currency gaining ground if there is sustained interest in high-yield assets. Overall volatility levels, however, are liable to be higher in the short term.
Any sustained divisions over Euro exchange rate policies would tend to strengthen the Swiss currency, possibly sharply, although Euro-zone political figures will attempt to play down the differences in the very short term.
Further gains in global stock markets would tend to undermine the Swiss currency, but volatility levels are liable to remain higher.