by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar pushed to challenge levels just beyond 1.54 against the Euro in European trading on Wednesday, but was again unable to sustain the gains.
US consumer prices rose 0.2% in April while the core increase was also slightly below expectations with a 0.1% increase. The monthly price change eased immediate fears over inflation to some extent, but there was still an underlying annual increase of 2.3% which is above the Fed’s comfort zone. Overall inflation fears are liable to persist, especially with energy prices still at elevated levels.
Markets are still expecting that interest rates will be left on hold at the June FOMC meeting and futures markets are also starting to price in a rate increase during the fourth quarter. The shift in expectations will continue to provide some degree of dollar support even though the futures markets may be over-optimistic over the economy and possibility of a rate increase.
Wall Street remained firm on Wednesday and there is the prospect of investment flows into the US markets which would support the US currency, especially with deteriorating confidence in the European economies.
There was a small 0.2% decline in Euro-zone industrial production for a 2.0% annual increase which did not have a significant market impact. The Euro-zone growth and inflation data will be monitored closely on Thursday to assess the potential ECB policy trends and a weak set of releases would trigger renewed selling pressure on the Euro.
There was still some degree of caution in Asian trading on Wednesday with volatility levels higher. This discouraged heavy yen selling, but the dollar held comfortably above the 104.0 level.
The Japanese wholesale price increase of 3.7% in the year to April did not have a significant impact with markets not expecting any short-term Bank of Japan response to rising inflation. The dollar was still hitting tough resistance above the 105.0 region in European trading.
Risk appetite improved again following the benign US inflation reading and this allowed a renewed dollar challenge on resistance levels. The US currency peaked around 105.45, but again struggled to break resistance levels.
Sterling consolidated in early European trading on Wednesday, but was unable to make any significant headway as sentiment remained weak.
The UK claimant count increased by 7,200 in April after a revised 3,600 increase the previous month and the back-to-back increase will increase expectations of a sharp economic slowdown. It was also the biggest unemployment increase for two years. Average earnings growth, however, rose to 4.0% from 3.7% which will maintain unease over inflation.
In the latest quarterly report, the Bank of England increased its inflation forecasts compared with the February report. The bank warned that inflation was liable to remain above the 3.0% level for several months and could increase to 4.0% compared with the 2.0% target.
There was also a downgrading of growth forecasts and the Bank Governor was notably pessimistic over the economic prospects. The bank will look to cut rates no more than once over the next six months to curb inflation which will reinforce Sterling’s yield support, but overall confidence in the economy will tend to deteriorate which will certainly limit any currency support. Sterling was trapped close to 0.7950 against the Euro, but found some support below 1.94 against the dollar.
The Swiss currency was ain on the defensive against the Euro during Wednesday and weakened to lows around 1.6330 before stabilising. The dollar again attacked the 1.06 level against the franc, which represented a two-month high, but the dollar was unable to push above this level.
Overall risk appetite was generally stronger over the day and this dampened immediate demand for the Swiss currency as Wall Street looked to push higher following the favourable inflation data.
Source: VantagePoint Intermarket Analysis Software
The Australian dollar was unable to make any significant headway on Wednesday with selling pressure above the 0.94 level against the US dollar. The domestic data was weaker than expected with the first-quarter wages increase held to 0.9% and this dampened expectations of any increase in interest rates over the next few months.
Global trends still dominated markets and a firmer US dollar trend unsettled the currency with a retreat to around 0.9340 in early Europe. Commodity-price trends will trigger further short-term volatility and the Australian dollar dipped to 0.93 in European trading before a slight corrective recovery.