by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar continued to move higher against the Euro on Tuesday with a break of resistance close to 1.3330. Despite a brief bounce, the Euro weakened back to 1.3310 later in US trading, a fresh two-month high for the US currency.
There was no significant US economic on Tuesday, but there was a renewed increase in Treasury bond yields which offered support to the US dollar. 10-year yields moved back to test the highs around 5.25% seen last week which attracted funds into the US currency.
The latest US retail sales report on Wednesday will be watched closely and a firm headline reading is realistic given a probable increase in gasoline sales. The core sales data will be watched closely for evidence on underlying spending trends and a weak figure would trigger renewed doubts over the US economic outlook. If yields stay at current levels, the dollar will secure further buying support.
There was further tough rhetoric from the ECB which will continue to provide underlying Euro support. The currency is still vulnerable to a reversal in speculative positioning given the high number of long positions built up over the past few weeks.
The yen was trapped close to the 121.70 level against the dollar on Tuesday, but secured gains to around 162.0 against the Euro. Stock market trends will again attract attention following the falls on Wall Street and a global retreat in prices over the next 24 hours would support the yen.
The Japanese wholesale prices index rose 2.2% in the year to May with some further evidence that inflationary pressure is edging higher. There will be further speculation that the Bank of Japan will increase interest rates by August which will deter yen selling. Interest rates are unlikely to be changed at this week’s meeting on Friday, but there is a possibility that some members will call for an increase.
The US Treasury’s semi-annual currency report will be monitored on Wednesday and a tough stance on China would put some upward pressure on Asian currencies, especially if China is named as a currency manipulator. The risk of yen gains will also increase if there is aggressive rhetoric over trade.
The UK currency dipped to 1.97 against the dollar after the UK inflation data on Tuesday, but recovered back to 1.9750 in US trade and strengthened towards 0.6740 against the Euro.
Consumer prices rose 0.3% in May with the annual inflation rate falling to 2.5% from 2.8% previously and compared with the 2.0% central bank target. The core inflation rate rose slightly to 1.9% from 1.8% while the retail prices inflation rate fell to 4.3% from 4.5%.
Following firm comments from Governor King on Monday, the bank will maintain a tightening bias, but there appears to be no immediate pressure for a further tightening which will dampen expectations of a July rate increase. The earnings data will be watched closely on Wednesday for further inflation evidence.
The global trade deficit narrowed to an 11-month low of GBP6.3bn for April from a revised GBP7.2bn in March which will help ease fears that Sterling strength will undermine exports.
The Swiss currency weakened to near 1.2450 against the dollar on Tuesday and also fell to levels around 1.6550 against the Euro before a fragile recovery.
There is still a very strong probability that the National Bank will increase interest rates at this Thursday’s meeting. Over the past 24 hours, there has been increased speculation that the bank will then signal a pause in tightening. Given the inflation fears, however, the bank is more likely to signal a continuation of the tightening process which would tend to strengthen the franc.
The Swiss currency will also gain some support if there is a renewed downturn in global stock markets, especially if trade tensions increase.
The Australian dollar strengthened back to 0.8440 in local trading on Tuesday. There was no further New Zealand Reserve Bank intervention to weaken the currency and this supported the Australian dollar, but gains were not sustained.
Confidence in the Australian economy also remains strong with further speculation over an interest rate increase within the next three months while the business confidence index remained strong. Markets will assess comments from Reserve Bank Governor Stevens closely on Thursday for further evidence on potential interest rate trends.