by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened sharply in early US trading with lows beyond 1.3550 before a recovery back to 1.3520 later in US trade as cross trading remained important. The dollar was unsettled to some extent by remarks from Fed Chairman Bernanke who stated that housing would be a drag on growth for longer than expected. These comments were similar to those in the May FOMC meeting, but the market was disappointed that he was not more optimistic over growth prospects.
The ISM index for the services sector strengthened to 59.7 in May from 56.0 in April, the highest reading for 13 months. There were stronger readings for orders, production and employment while there was also a renewed increase in the prices component to a 10-month high. The data flow overall should provide support to the dollar via confidence in the economy and higher bond yields.
The Euro-zone PMI index for the services sector edged stronger to 57.3 in May from 57.0 despite a slowdown in France and Germany. The Euro is likely to remain supported ahead of Wednesday’s ECB interest rate decision with a very strong probability that rates will be increased by 0.25% to 4.0%.
There will be expectations of a tough ECB stance in the press conference following the decision and further rate increases beyond June. The ECB is, however, likely to be more reluctant to give clear signals over future policy which will tend to curb strong Euro buying. There will also be some unease over further gold selling by the Spanish central bank which suggests further difficulties in the economy.
Source: VantagePoint Software, Market Technologies, LLC
The yen found further support close to 122.0 against the dollar and strengthened back to highs around 121.20 while the yen also recovered from record lows beyond 164.50 against the Euro. The yen was still being sold on rallies as volatility levels increased.
There were no significant domestic factors to influence the yen with attention still focussed firmly on carry trades. The yen has struggled to secure any support even when the Chinese markets were subjected to fresh selling pressure.
The yen will be in a stronger position to appreciate if there are sustained falls on Wall Street and US markets had a generally weaker tone on Tuesday.
Sterling was blocked close to 0.6770 against the Euro on Tuesday and weakened to 0.6785 in US trade. The UK currency also hit resistance above 1.9950 against the dollar and weakened back to 1.9925. Sterling trends will continue to be correlated with carry trade developments.
The latest BRC retail sales report recorded a slowdown in annual like-for-like growth to 1.8% from 2.5%, the lowest figure for six months, and there will be further speculation over a slowdown in spending which will curb Sterling buying.
The shadow MPC of academics narrowly voted for rates to be left on hold in their latest round of voting with a number of calls for higher interest rates. Speculation that the Bank of England will tighten again at this Thursday’s policy meeting will make markets reluctant to sell Sterling ahead of the decision, but the UK currency will then be vulnerable to selling if rates are left on hold.
The Swiss currency found support beyond 1.6500 against the Euro on Tuesday with gains to 1.6465 in US trade. The Swiss currency also strengthened to 1.2165 against the dollar with the US currency struggling to secure a recovery.
The franc’s performance remained generally impressive during the day with the prospect of a National Bank interest rate increase next week.
The Swiss currency will gain some support if the ECB sounds cautious over further interest rate increases after Wednesday’s council meeting.
The Australian dollar remained form in local trading on Tuesday and pushed to highs just above 0.84 in early US trading before a partial retreat to 0.8365.
The domestic growth data was firm with a rise in the AIG services-sector index while the current account deficit for the first quarter was little changed at AUD15.4bn from AUD15.5bn previously.
The Australian dollar will jump higher if interest rate are increased on Wednesday, although an unchanged policy looks more likely which could trigger some mild profit taking. Carry trades will remain very important in the short term with Australian dollar volatility is liable to increase.