by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to sustain levels near 1.5450 against the Euro on Wednesday and weakened steadily during the day. The US currency was vulnerable to a correction after very sharp gains seen over the previous two days.
The US currency was also unsettled by a renewed increase in oil prices and a sharp drop on Wall Street as volatility levels remained high. Trading conditions are likely to remain very choppy in the short term, especially as further increases in oil prices would exacerbate underlying inflation pressures. In this environment, the Federal Reserve is likely to maintain a generally tough rhetoric, although Fed governor Kohn was slightly less hawkish in comments on Wednesday.
The Fed Beige Book reported that the economy was generally subdued with weaker activity in several districts. There were inflation pressures, although companies were struggling to pass on cost increases. The retail sales report will be watched closely on Thursday for further evidence on consumer spending trends.
ECB member Stark stated that the ECB was not planning on a series of interest rate increases and this undermined the Euro to some extent as markets had been pricing in more than a single rate increase over the next few months. Underlying fears over the Euro-zone economy will also persist in the short term.
There will be some political nerves ahead of the Irish Lisbon Treaty referendum result on Thursday as no vote would be likely to unsettle the currency to some extent even if the immediate impact is limited. The dollar weakened to lows around 1.5585 before consolidating around 1.5560.
Japan’s first-quarter GDP was revised up to 1.0% from a provisional 0.8% as capital spending estimates were revised up. Wholesale prices rose 4.7% in the year to April which was the fastest increase for 27 years. There will be a further temptation to sell the currency on yield grounds unless the Bank of Japan responds to the inflation threat with suggestions that interest rates could be increased.
The yen initially remained under pressure on Wednesday and weakened to lows around 107.70 as low-yield currencies remained generally weak while the Japanese currency also tested fresh 2008 lows against the Euro.
The yen regained some ground in New York as there was a sharp decline on Wall Street and a reduction in risk appetite with the dollar dipping to below the 107.0 level as profit taking was also a notable feature. Higher volatility is likely to remain the key short-term market element.
Sterling dipped to lows below 1.95 against the dollar on Wednesday, but then recovered to push back above the 1.96 level. The UK currency held little changed against the Euro with further resistance close to the 0.79 level.
The latest UK employment data recorded a claimant count increase of 9,000 in May after a revised 11,200 rise the previous month and earnings growth was lower than expected at 3.8% from 4.0% previously.
This combination of data will reinforce fears over a sharp downturn in the economy, although the impact should be measured given the inflation fears as the Bank of England will not be in a position to cut interest rates at this stage. The trade balance was also weaker than expected with a GBP7.6bn visible deficit for April.
The dollar was unable to push above the 1.0450 level against the franc on Wednesday and dipped to lows near 1.03 in US trading. The Swiss currency also regained ground against the Euro with a move to 1.6070.
A renewed slide in stock markets and an increase in oil prices triggered a fresh round of risk aversion which helped support the Swiss currency, especially in early US trading.
There was also some speculation that the National Bank would be forced to raise interest rates to combat inflationary pressure which provided some background currency support and volatilities are likely to remain high in the short term.
The Australian dollar was unable to make any significant headway in local trading on Wednesday.
The domestic data offered no support with a sharp decline in consumer confidence to a 15-year low. The Australian currency should still gain some support from potential capital inflows from Japan, but there will be significant caution over the prospects for equity markets.
The Australian dollar was unable to regain the 0.95 level on Wednesday. The inability to gain any support from a weaker US currency and rally in commodity prices suggests that buying support has faded for now.