by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar found support towards the 1.5550 level on Wednesday, but was unable to break Euro support levels around 1.5460 and again consolidated close to 1.55 in Europe. A weaker Wall Street trend pushed the US currency weaker in New York trading with a retreat to 1.5530.
There was a further slight downgrading of US interest rate expectations which curbed dollar demand to some extent during the day, especially as equity prices weakened. Futures markets cut the chances of an August rate increase to just below 50% from close to 100% last week.
There is likely to be significant caution ahead of the Federal Reserve meeting next week and the dollar should still gain some protection from speculation that the Fed will switch towards a tightening bias given the increase in inflation fears.
The ECB maintained a firm stance on interest rates in comments on Wednesday with warnings over second-round inflation events. There will still be the risk of internal divisions within the central bank which may be an unsettling influence.
The political stresses surrounding the Lisbon Treaty will also be monitored following the Irish no vote last week and these concerns will tend to limit Euro support.
The dollar was holding close to the 108.0 level in early Europe on Wednesday with the currency maintaining a corrective tone while the yen weakened to a fresh 2008 low against the Euro.
The latest Bank of Japan minutes recorded that there were concerns over growth and inflation trends within the bank, in line with the difficulties faced by all the major central banks. The most likely outcome is that the bank will maintain a steady course in the short term.
The yen will, therefore, remain vulnerable on yield grounds, but caution is liable to increase given uncertainties over the global economy and this will tend to discourage an aggressive move into carry trades.
Equity markets remained on the defensive during Wednesday and the yen was able to regain the 108.0 level against the dollar while there was some recovery against the Euro.
Sterling again found support below the 1.95 level against the dollar on Wednesday with a move back towards 1.96 while the UK currency also found support close to 0.7950 against the Euro in tentative trading.
According to the MPC minutes, the Bank of England voted 8-1 to hold interest rates steady at the June meeting with Blanchflower again voting for a cut due to his perception that the downside growth risks were more serious than inflation. Some members discussed whether a rate increase should be considered, but it was thought that an immediate move would be counter-productive.
The interest rate debate will continue to be very important for Sterling sentiment in the short term and markets will continue to monitor Bank of England comments very closely. A more hawkish stance and warnings over higher rates would provide some degree of Sterling support.
The CBI industrial survey recorded an increase in the orders component to +1 in June from -10 the previous month which should provide some relief over the manufacturing sector, although the market impact will be limited.
The Swiss currency resisted a further test of support close to 1.62 against the Euro on Wednesday, strengthening to around 1.6100, while the franc also strengthened to 1.04 against the dollar. The franc was unsettled slightly by a weaker ZEW survey of economic conditions.
The National Bank will hold its quarterly meeting on Thursday and there has been some speculation that the bank will move to increase rates although the consensus expectation is that the bank will hold rates steady at 2.75%.
The franc is likely to gain immediate support if there is a rate increase, especially if the bank raises expectations over a possible series of rate increases.
The Swiss currency will gain some support if there is a sustained deterioration in risk aversion and a further decline in global stock markets.
The Australian dollar was able to hold above the 0.94 level against the US currency on Wednesday. There were no significant domestic developments with the Australian dollar still undermined to some extent by the less aggressive Reserve Bank minutes which has dampened rate expectations.
There has also been some caution over carry trades given financial-market stresses and sustained downward pressure on stock markets would unsettle the currency. The Australian dollar will gain some further near-term support from a downgrading of US interest rate expectations and there was a push to 0.9470 in US trading as commodity prices strengthened.