by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to strengthen through 1.5650 against the Euroon Wednesday and weakened to lows around 1.5750 beforeconsolidation around 1.5730 later in New York.
Oil and commodity prices rallied following the sharp decline seen on Tuesday and this tended to weaken the US currency slightly. In contrast, the US currency gained some support from a Russian announcement that the Rouble’s tradingband would be widened as this should curb Euro demand.
There were no significant US economic datareleases on Wednesday and the Thursday calendar is also relatively light. The jobless claims figures will still be watched closely following the increase to above 400,000 in last week as a further increase would reinforce fears over a weaker labour market.
The remarks from Fed Chairman Bernanke will again be monitored very closely on Thursday. In particular, markets will be looking for the Fed’s stance oninterest ratesand the dollar. Any increase in concerns over the economy would tend to undermine the dollar, although caution is liable to prevail given the uncertainties.
ECB President Trichet took a firm stance on inflationin remarks on Wednesday, although he also stated that it was important for the US to repeat its support for a strong currency. These comments reinforced speculation over further G8 efforts to underpin the US currency.
The Japanese economic data was stronger than expected for the second day running with a 10.4% increase in core machinery orders to give a 5.1% annual increase. There will be some reassurance that capital spending plans will not be cut back sharply which will also underpin the yen to some extent.
Although immediate risk appetite improved on Wednesday, underlying fears over the global financial sector will persist which will provide some degree of yen support with a reluctance to maintain aggressive positions. Positive factors will continue to be offset by yen selling on any significant gains as yield factors encourage capital outflows.
The dollar retained a firm tone at 107.50 in early Europe on Wednesday before drifting back towards the 106.80 in New York.
Sentiment towards the UK economy remains weak as the stream of negative reports has continued. The latest seasonally-adjusted Nationwide consumer confidence data recorded a further decline to 61 in June from 65 which was the weakest level since the survey started in 2004.
The UK currency staged a limited recovery against the dollar on Wednesday with support below the 1.97 level while it also recovered against the Euro with a move to 0.7940 from lows near 0.7975.
Thursday’s Bank of England interest rate decision will be potentially very important for the currency. A case can be made for all possible outcomes as the increased recession fears will create pressure for a cut in rates while inflation pressures will lead to calls for an increase. Given the uncertainties, there will also be a strong case for rates to be left on hold to await further developments. The most likely outcome is for no change while Sterling will move sharply if there is a change in rates.
The goods trade deficit was GBP7.6bn for April which will not have a big impact. The headline shortfall is a slight negative factor for Sterling, although the impact will be cushioned by a healthy rate of export growth.
The Swiss currency was still generally on the defensive against the Euro on Wednesday with a dip to beyond the 1.62 level which was 2-week low for the franc.
The currency gained some temporary support on Wednesday following reports of Iranian missile tests and a decisive trend may not be forthcoming in the short term with consolidation just above the 1.03 level against the dollar.
Underlying sentiment towards the franc is still fragile with fears over a sharp deterioration in the economy if the banking sector comes under further pressure.
The Australian currency was unable to sustain the recovery and retreated to a 3-week low against the US dollar at 0.9480 n local trading on Wednesday. The domestic data was significantly weaker than expected and maintained fears over the economic trends.
The latest consumer confidence indicator weakened to a 16-year low while there was a further sharp decline in housing finance of 7.9% for the month. The domestic fears will curb currency support, especially if there is a poor employment report on Thursday. The Australian dollar will also be vulnerable to selling pressure on a further decline in commodity prices, but there will be buying support on dips and a weaker US currency allowed a recovery back to 0.9570 in US trading.