by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The data releases provided no support to the US currency as consumer confidence fell to 50.4 in June from a revised 58.1 the previous month. This was the 5th lowest reading of all time and will reinforce fears over the consumer spending trends. The Richmond Fed index also fell sharply over the month while there was a 15.3% decline in the Case-Shiller house-price index in the year to April, although this was slightly better than expected. The weak confidence data pushed the dollar to lows around 1.5620 before consolidation around 1.5570 later in New York.
Inflation fears were also significant with the 1-year inflation expectations index at 7.7% within the confidence data. The combination of growth and inflation fears will reinforce the difficulties faced by the Federal Reserve.
There is a strong probability that the Fed will leave interest rates on hold at 2.0% following the FOMC meeting on Wednesday. The statement will be watched extremely closely and will be very important for near-term market direction. The dollar will be vulnerable to renewed selling pressure if the Fed concentrates on growth risks while a greater emphasis on the need to control inflation and a tightening bias would provide some significant degree of support. Any references to the need to curb dollar weakness will also be watched very closely.
There was a further decline in German consumer confidence in the latest reading and fears over the European growth outlook will continue to increase even though French consumer confidence increased. In this environment, the dollar and Euro will both struggle to secure decisive investor support.
With a lack of confidence in the domestic economy and low yields, there are strong expectations that Japanese retail investors will push funds into overseas assets through the launch of new investment trusts. This will be particularly important over the next few weeks following the receipt of annual bonus payments.
These expectations maintained a generally weak yen tone in Asian trading on Tuesday with the US currency again probing resistance levels above the 108.0 region. The yen was also still on the defensive against the Euro with a test of support levels beyond 168.0 which represented an 11-month low for the yen.
The US currency dipped to lows of 107.35 following the US data before recovering some ground as Wall Street attempted to rally from initial losses.
The UK currency found support on dips towards the 1.96 level against the US dollar on Tuesday and rallied back towards 1.97. Sterling also found some support weaker than the 0.7920 level against the Euro, although it was unable to make any significant headway.
Underlying fears over the economy will continue to limit the scope for currency gains, illustrated by the latest housing data. The BBA recorded a drop in mortgage approvals to 28,000 in from 34,800 the previous month which was the lowest reading for at lest 10 years with a 56% year-on-year decline. The weakness will reinforce speculation that the Bank of England will look to resist higher interest rates to help protect the economy despite the inflation pressures.
The UK currency secured some protection from persistently weak data in the US and Euro-zone as the relative UK outlook looked less threatening.
The dollar hit further resistance close to 1.0480 against the franc on Monday and weakened to lows around 1.0350 following the weaker than expected US data. The Euro was also struggling to hold stronger than 1.62 against the Swiss currency, but there was further evidence of franc selling on rallies.
The franc gained some initial support from speculation that HSBC would look to take a stake or mount a full takeover bid for Swiss banking group UBS.
The latest consumption index fell to 1.91 in May from 2.15 the previous month which will maintain unease over Swiss economic trends, although the index is still relatively firm in historic terms.
The Australian dollar recovered ground in local trading on Tuesday with a move back towards the 0.9550 resistance level. The Australian currency was boosted by a strong increase in iron ore prices in the latest contract with China which will underpin optimism over export earnings trends.
The currency also gained some support from investment flows into Australian from Japan as investors looked for high yields. The weaker US currency allowed Australian dollar gains to highs around 0.9585 in US trading before a corrective retreat to 0.9550.