by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The Eurowas unable to push back above the 1.58 on Wednesday and weakened to test support below 1.57 in US tradingwith consolidation just below this level.
Oil pricesweakened further over the day which provided support to the US currency while a sharp drop in gold prices was also an important positive influence.
The Federal ReserveBeige Book reported that growth had slowed somewhat while inflationary pressure was elevated. The report also stated that wage pressures were limited with a soft labour market. Regional Fed President Plosser repeated tough comments on Wednesday as he stated that rates would need to rise soon and the inflationworries helped boost US yields.
There we no significant US data releases on Wednesday and the corporate earnings report also did not have a major impact. The latest housing and employment data will be watched closely on Thursday with the home sales data particularly important.
Markets have moved back towards pricing in Federal Reserve interest ratecuts during the Autumn and will be looking to assess whether the data provides any justification for a tighter stance. A weak set of data would trigger renewed doubts over rate trends which would undermine the dollar.
The Euro-zone industrial orders data was weaker than expected with a sharp monthly decline which will maintain unease over economic trends. The German IFO data, allied with the PMItrend, will be very important for underlying sentiment towards the Euro-zone. A series of weak data would undermine the Euro directly and would also increase pressure for the ECB to adopt a less restrictive policy stance.
The US currency pushed above the 200-day moving averageduring Asia on Wednesday and a sustained move above this level, currently around 107.15, would tend to ease underlying negative dollar sentiment.
There will, however, be an increase in dollar selling by exporters, especially on any gains towards the 108.0 level which may stifle any further gains. The dollar held firm over the remainder of the day as the yen dipped to record lows against the Euro.
The US currency strengthened further in New York, but was unable to extend gains above the 108.0 level as profit taking was an important feature.
Sterling held firm in early Europe on Wednesday. The latest minutes recorded that the Bank of EnglandMPC committee voted 7-2 for unchanged interest rates in July with Blanchflower voting for a cut while Besley voted for an increase due to the need to control inflation expectations.
The minutes will provide some near-term Sterling support on yield grounds, especially as there was little apparent discussion of a cut in rates. Markets will also be looking to extend carry trades.
There will still be apprehension over the latest retail sales data which is due for release on Thursday, especially as there will be expectations of a sharp decline following the surprise surge in sales last month.
The data releases on Thursday were also weak with the CBI orders survey dipping to -8 from 1 the previous month while the overall sentiment index weakened to the lowest level for over six years. Mortgage approvals through the bankingsector also weakened to all-time lows below the 25,000 level for June which will curb Sterling support.
Following the MPC minutes, Sterling strengthened to test levels beyond 0.79 against the Euro with a peak close to 0.7840. The UK currency was also resilient against the dollar with consolidationjust below the 2.00 level.
The Swiss currency remained on the defensive during Wednesday, weakening to test levels beyond the 1.63 level against the Euro. The dollar also extended the sharp gains against the franc seen late in Tuesday with a peak around 1.04.
The sharp decline in oil and gold prices lessened immediate demand for the Swiss currency as risk appetite remained firmer.
A weak set of Euro-zone data would have a mixed franc impact and would be unlikely to provide strong support against the Euro.
Source: VantagePoint Intermarket Analysis Software
The headline domestic consumer pricesdata was above expectations with a 1.5% increase to give a 4.5% annual ratewhile there was a 4.4% core annual increase which was the highest rate for 17 years. The data provided only a temporary Australian dollarlift with markets suspecting that the data was not strong enough to trigger higher interest rates.
The Australian currency will gain some support from an improvement in risk appetite and flows from Japan, but weaker commodity priceshelped trigger a move to lows near 0.96.