by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar strengthened to test Euro support levels near 1.5370 in early US trading on Thursday, but then reversed course sharply.
At the latest council meeting, the ECB left interest rates at the 4.00% level. In the press conference following the decision, ECB President Trichet took a significantly tougher stance than expected. Trichet stated that inflation concerns had increased and that the bank was strongly committed to avoiding second-round inflation effects. The ECB raised its 2008 inflation forecast to 3.4% from 2.9% previously.
Trichet stated that there had been some calls for interest rates to be increased while the bank was in a heightened state of alert. The ECB head stated that a small interest rate increase was a possibility and could come as early as July.
The very hawkish tone will underpin the Euro in the short term. There will, however, be a suspicion of more serious divisions within the ECB members while there will also be fears that any increase in rates from current levels would further damage the Euro-zone economy. More serious signs of weakness would also increase opposition to an interest rate increase.
The US data was again slightly stronger than expected with initial jobless claims declining to 357,000 in the latest week from a revised 375,000 previously. The data will create some caution optimism towards the Friday payroll data.
The US data will inevitably be watched closely on Friday and a lower than expected employment drop would underpin the dollar, although the impact may again be muted by a further discussion of the ECB policy and European outlook. The hawkish ECB stance pushed the Euro highs near 1.56 against the dollar, close to the level where Bernanke’s comments weakened the Euro on Tuesday.
Yen
Sentiment towards Asian currencies was generally weaker on Thursday which also curbed immediate yen demand. The latest capital account data recorded significant net inflows into Japanese money-market instruments, probably reflecting the increased caution over global financial stocks, and these flows will provide some initial yen support.
Improved sentiment allowed the US currency to test resistance levels above 105.50 in early Europe on Thursday with exporter selling likely to increase above this level and this should strengthen yen support.
The dollar was still able to push to highs around 106.40 against the dollar, but was unable to hold above 106.0 as Wall Street weakened after Standard & Poors lowered the credit ratings on the US bond insurers. The yen suffered sharp losses against the Euro with lows close to 165.0 after the tough ECB stance.
Sterling
Sterling sentiment was damaged further by a 2.4% decline in the monthly Halifax house-price index to give a 3.8% annual decline and the UK currency tested levels below 1.95 against the dollar.
As expected, the Bank of England left interest rates on hold following the latest MPC meeting. The bank did not issue a statement with the decision and the vote split will not be known until the minutes are released in two weeks time.
Sterling was unable to gain any significant traction on yield grounds following the decision and weakened to lows beyond 0.7950 against the Euro after the tougher than expected ECB stance. Overall confidence in the economy will remain weak as stagflation fears increase.
Swiss Franc
The Swiss currency weakened steadily against the Euro during the day due to some recovery in risk appetite and the aggressive ECB stance on interest rates which provided wider Euro support.
The dollar strengthened to highs around 1.0520 against the franc before retreating sharply to 1.0350 in New York.
There are likely to be increased fears over the risks of a global combination of weak growth and higher inflation. These concerns are likely to provide some underlying franc support on defensive grounds and the currency also erased losses as Wall Street weakened.
Source: VantagePoint Intermarket Analysis Software
Australian dollar
The Australian dollar again found support close to the 0.95 level against the US currency on Thursday. The domestic trade data was better than expected with the monthly deficit falling to AUD1.0bn in April from AUD2.7bn, but this did not have a significant impact.
The Australian currency drew support from buying against the New Zealand dollar, but the positive influence was offset by a decline in commodity prices. The Australian dollar rallied in New York as the US currency reversed course, but it was unable to regain the 0.96 level and choppy trading conditions are liable to persist in the short term.
