by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The Euro pushed higher in early European trading on Wednesday, but again was subjected to selling pressure on gains and, after peaking close to 1.5760, the currency dipped sharply.
The Euro advanced initially after stronger than expected regional German inflation figures. The data from the states recorded a 0.6% monthly increase for May which pushed the annual increase to 3.0% compared with an expected 2.8% and 2.6% in April. The higher inflation data will increase speculation that there will be a high reading for Euro-zone inflation on Friday and will also reinforce ECB determination to retain a tough policy.
The Euro was unsettled by the latest current account data. There was a sharp deterioration for March with a deficit of EUR15.3bn which was the highest monthly deficit since the Euro was introduced in 1999. In addition to the current account shortfall, there were increased outflows of investment capital. The data will increase fears that the Euro-zone is losing competitiveness and suffering capital outflows which will tend to undermine the Euro.
There was a headline decline in US durable goods orders for April of 0.5% after a revised 0.3% decline the previous month. There was, however, a firm 2.5% increase in underlying orders while the underlying non-defence orders also rose strongly and this series is an important leading indicator of industrial strength. Overall, the data should have some net positive impact on sentiment towards the economy.
The dollar pushed to highs around 1.5610, helped by lower oil prices, and consolidated around 1.5640 later in New York as energy prices moved higher again.
There was further interest in carry trades which tended to curb demand for the Japanese currency on Wednesday with the Australian dollar, for example, at a three-month high against the yen. The yen was also still being hampered by vulnerability against the Euro as markets looked to test resistance levels above 164.0.
Bank of Japan Governor Shirakawa stated on Wednesday that the bank should look beyond short-term price moves to set interest rate policy with a wider focus on overall monetary indicators. The overall yield considerations will remain negative for the Japanese currency.
The US dollar pushed to highs near 105.30 against the yen following the US durables goods data, but was unable to sustain the advance and retreated to 104.65.
Sterling found support close to 0.7955 against the Euro on Wednesday and strengthened to test levels beyond the 0.79 level in US trading. Sterling found support close to 1.97 against the dollar and settled nearer 1.98 with some significant selling pressure above this level.
The latest YouGov survey reported a further increase in inflation expectations to above the 4.0% level from 3.8% in April and the Bank of England will be determined to avoid and further surge in expectations. In this context, it will remain difficult to sanction a near-term cut in interest rates.
The Euro again found support close to the 1.6150 level against the franc on Wednesday and strengthened back to 1.6275 in early US trading as the US data boosted confidence in the global stock markets.
The dollar also pushed to highs around 1.0425 against the franc before correcting weaker.
The franc lost ground as risk appetite improved, but there was some fresh franc support as oil prices attempted to regain ground in US trading. Overall defensive demand for the currency should remain lower in the short term, although choppy trading is liable to be a feature.
The Australian dollar found support close to the 0.9550 level against the US currency and pushed back to above 0.96 in local trading on Wednesday.
There was a stronger than expected increase in construction activity according to the latest report. Although the direct impact was limited, there was further speculation that the Reserve Bank would increase interest rates over the next few months which boosted the currency.
The Australian dollar will tend to weaken if there is a further decline in commodity prices, but there will also be strong buying on dips given underlying confidence in the currency. In this context, the currency pushed back above the 0.96 level in New York.