by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The Euro was unable to hold above the 1.55 level against the dollar on Wednesday and weakened steadily during the day.
In this context, the Euro-zone data during the day was negative for the currency. Retail sales fell by 0.4% in March which triggered a record annual decline of 1.6%. In addition, German factory orders fell by 0.6% for the second successive month to give an annual decline of 5.0%. Evidence of weakness in the retail and industrial sector will continue to undermine confidence in the economy and currency.
Thursday’s ECB decision and tone will be very important for near-term currency direction. During Wednesday, the Euro was undermined by speculation that the ECB will effectively take a more moderate stance on inflation and interest rates. The ECB will want to maintain a tough stance on inflation and a robust tone would tend to provide initial Euro support, although the currency will find it difficult to make significant progress if the economic data remains weak.
US pending home sales fell by 1.0% in April after a revised 2.8% drop the previous month, but the impact was limited with the realtors association suggesting that some recovery was realistic over the next few months. A firm stance on inflation by Fed officials will offer some degree of dollar support as yield spreads improved. There will still be fears over economic conditions and high oil prices remain a significant negative factor for the US currency.
Tokyo markets were open on Wednesday after a two-day holiday, but there were no significant domestic influences as international influences remained dominant. The high level of oil prices will tend to undermine the yen to some extent, although the impact will be offset by the impact of energy-price trends on levels of risk aversion.
The dollar pushed to highs around 105.60 against the yen, but was unable to sustain the gains and weakened back to below the 105.0 level in New York. The Japanese currency moves were still being driven by equity market trends and the yen strengthened back to 104.70 in New York as Wall Street came under selling pressure.
The UK economic data has remained weak over the past 24 hours which has undermined the currency. The latest Nationwide consumer confidence data recorded a further decline to a four-year low of 70 in April from 77 the previous month, reinforcing fears over consumer spending trends.
Industrial production also fell 0.5% in March which increase speculation over a near-term interest rate cut as it suggests that the manufacturing sector is unable to help compensate for consumer-sector weakness. Following the data, Sterling weakened to lows around 1.9550 against the dollar and was testing levels beyond 0.79 against the Euro.
Wider Euro losses help protect Sterling during the day, but the UK currency dipped to an 11-week low against the dollar.
Thursday’s Bank of England interest rate decision will be critical for near-term currency direction. Sterling will weaken immediately on a cut, although the impact should now be more measured given the increase in speculation over a reduction that has been seen over the past few days.
The Swiss franc found further support weaker than 1.63 against the Euro on Wednesday and pushed back to 1.6250 in New York trading as the Euro suffered wider losses. The dollar pushed back towards 1.06 against the franc before consolidating around 1.0550.
The Swiss currency also gained support from sharp falls on Wall Street, illustrating that franc moves are still being influenced strongly by levels of risk aversion in the market.
The ECB interest rate decision and statement will be watched very closely on Thursday. A softer stance by the bank would tend to underpin the Swiss franc against the Euro, although the impact would be limited by improved risk tolerances.
The Australian dollar remained strong in local trading on Wednesday with a challenge on resistance levels around 0.95 against the US currency. The domestic influences were limited and did not provide any net support as unease over the housing-sector trends persisted.
The Australian dollar secured support from gains in commodity prices and overall levels of risk aversion were still lower. Overall confidence should remain firm in the short term, but the currency will be increasingly vulnerable to a correction. A firmer US dollar trend and Wall Street losses helped push the Australian currency back to around 0.9420 in US trading.