by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar consolidated around the 1.5450 region for much of the day. The US data was again generally stronger than expected which provided some background support for the currency. The ADP report recorded a private-sector employment increase of 40,000 for May after a revised 13,000 increase for April.
In theory, this will increase optimism over the Friday payroll report, but there will be a strong sense of caution as the ADP report has tended to over-estimate employment gains over the past few months and markets will still be expecting an official decline in jobs.
The PMI report for the non-manufacturing sector held little changed at 51.7 in May from 52.0 previously and, crucially, remained above the 50.0 level. The orders and prices components were stronger, but the employment index was weaker. The data overall should maintain a more optimistic tone towards the US economy and currency. Fed Chairman Bernanke also delivered a hawkish stance with comments that inflation was significantly higher than the Fed wants. Following comments on the dollar yesterday, this stance will tend to underpin the currency and it edged stronger as crude oil prices fell.
The final services-sector PMI for the Euro-zone was unchanged at 50.6 for May even though there was further deterioration in Italy and France. In contrast, Euro-zone retail sales fell by a further 0.6% in April after a 0.9% decline the previous month to give an annual decline of 2.9% which will maintain fears over the economic trends.
The ECB rate decision and press conference will be watched very closely on Thursday. The Euro will be vulnerable to further selling if there is evidence of a softer stance, although the central bank will want to maintain a tough approach on inflation.
The dollar generally consolidated in Asian trading on Wednesday. The focus will remain on important technical levels for medium-term direction with initial attention on the dollar resistance levels in the 105.50 – 105.80 band.
Underlying exporter dollar selling will remain a feature at elevated levels which will tend to slow any US currency advance. There has been further unease over the global financial sector which will provide short-term yen support and the yen strengthened back through 105.00 in Europe with a peak near 104.55.
The Japanese currency also pushed to a two-week high against the Euro, but drifted weaker in US trading as fears over the banking sector eased slightly with the dollar retaking the 105.0 level.
Sterling remained under pressure on Wednesday as the UK data releases provided no support. The UK currency dipped to lows around 1.9525 against the dollar while the Euro challenged resistance levels above the 0.79 level.
The PMI index for the services sector weakened to 49.8 in May from 50.4 previously and the figure below 50.0 will reinforce fears over the domestic economy, especially as it was the first reading below this level for over five years.
There will be some speculation that the Bank of England will cut interest rates on Thursday, although the data was probably not weak enough to trigger an immediate bank move given that inflation fears have intensified.
If the bank leaves rates on hold, Sterling is likely to rally slightly, but confidence will remain very weak. There is a small chance of a rate cut which would push the currency sharply weaker.
The Swiss currency held firm against the Euro for much of Wednesday as equity markets were generally on the defensive with sizeable losses in European trading. The franc pushed to highs around 1.6030 before a retreat to 1.6090. The dollar looked to find support below the 1.04 level against the franc in choppy trading and was holding just above this level in New York.
The Swiss currency moves will continue to be influenced strongly by degrees of risk appetite and any recovery in confidence towards the banking sector would lessen near-term demand for the franc.
The Australian currency found firm support below the 0.95 level in local trading on Wednesday. GDP recorded a 0.6% increase for the first quarter of 2008 compared with expectations of a 0.3% rise. The economic resilience will underpin the currency and markets continued to price in an increase in interest rates later this year. Yield support will, therefore, remain intact and the Australian dollar pushed back to challenge levels above 0.96 in US trading.
The Australian dollar will still tend to be dented by any further US currency rally and drifted weaker in New York, although it remained generally firm.