by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The Euro hit resistance above the 1.5560 level against the dollar in early Europe on Monday and drifted weaker towards 1.55.
The revised Euro-zone PMI indices were little change for May with the manufacturing index at 50.6. There will be further expectations of a steady deterioration with the Spanish and Italian PMI figures significantly below the 50.0 threshold for the month.
The ECB has maintained a steady tone in comments on Monday and will be reluctant to make major comments ahead of Thursday’s interest rate announcement unless the bank wants to send a clear market signal ahead of the meeting.
The US ISM index strengthened to 49.6 in May from 48.6 the previous month as most components improved, although the employment component was again well below the 50.0 level which suggests that the number of manufacturing jobs is continuing to decline. The report overall will maintain the slightly higher degree of confidence in the US economy and dollar, although the impact should be subdued.
Comments from Fed Chairman Bernanke will be watched closely on Tuesday and any hint over higher interest rates would help support the US currency.
Oil prices rebounded from initial lows and weakened with a brief spike to 1.5585 as Wall Street dipped sharply before consolidation around 1.5540.
Markets were generally in a consolidation phase in Asian trading on Monday ahead of key events later this week. Yen selling was curbed to some extent by an increase in domestic bond yields and pressure for a correction.
The dollar pushed higher towards the 105.50 level in early Europe, but retreating to 104.70 as risk aversion increased again. The yen was supported by a drop in global stock markets while the Japanese currency gained significant support against the Euro.
A decline on Wall Street helped sustain the firm yen tone with sharp gains to 104.00 before consolidation around 104.30 while the Japanese currency also strengthened to an 11-day high against the Euro. The yen will gain ground if financial market stresses continue, although fresh buying support for stocks may emerge quickly.
Sterling was unsettled in Asian trading on Monday by fears over the UK banking sector as the Bradford and Bingley bank issued a profits warning and discounted rights issue. This warning triggered further speculation that the UK housing sector would continue to deteriorate.
The impact should be offset slightly by news of an overseas stake in the bank, but underlying Sterling sentiment remained generally weak with a lack of confidence in the domestic economy contributing to short-term selling pressure. The UK currency weakened back beyond 0.79 against the Euro and dipped sharply to lows near 1.96 against the dollar before a tentative recovery.
The shadow MPC committee, comprised of academics voted by an 8-1 margin for unchanged rates ahead of the official MPC interest rate decision this Thursday. The UK data releases were also weak with the PMI index for the manufacturing sector weakening to 50.0 in May from 50.8 the previous month and this was the lowest outcome for close to three years. Mortgage approvals were at a 15-year low and there will be pressure for lower interest rates.
The dollar was unable to push back above the 1.0450 level against the US currency on Monday and dipped back to lows below 1.04 in New York with a trough around 1.0325 as Wall Street dipped sharply. The franc strengthened consistently against the Euro during the day with highs around 1.6080.
Global equity markets were generally weaker which helped support the Swiss currency, especially as overall confidence in the financial sector was lower.
First-quarter GDP growth amounted to 0.3% with a 3.0% annual increase which did not have a significant impact as attention was firmly on the banking sector.
The domestic data on Monday was weaker than expected with a 0.2% drop in retail sales for April compared with expectations of a small expected increase. The PMI index also weakened, but there was an increase in the TDI inflation expectations index to 4.5% which was a five-year high.
The inflation evidence will keep the Reserve Bank on inflation alert and maintain speculation that the Reserve Bank could increase interest rates which will reinforce yield support.
There was further Australian dollar support near the 0.95 level and it consolidated near 0.9550 in US trading as commodity prices attempted to rebound, although the currency struggled to regain momentum.