by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar drifted back to near 1.42 against the Euro ahead of the US data releases, but secured a firmer tone in US trading as the data, on balance, was slightly stronger than expected. With the Euro also undermined by the inability to push above the 1.42 level, the dollar strengthened to highs around 1.4110.
The ADP report recorded an employment increase of 58,000 in September from a downwardly-revised 27,000 increase the previous month. The data estimates private-sector employment only and is consistent with monthly payroll growth of around 80,000, although there will be uncertainty over government employment given the surprise drop last month.
The ISM index for the services sector fell to 54.8 in September from 55.8 which was the lowest since March, although close to expectations. Within the data, there was a strong reading for the prices component while the employment index also recovered which will provide some optimism over the Friday payroll report. The data overall will ease immediate fears over a sharp slide in the economy.
The ECB will take centre stage on Thursday and the most likely outcome is that the bank will leave rates unchanged. If so, the statement from ECB President Trichet will be watched very closely and the Euro will tend to weaken if the bank backs away from suggestions that interest rates will be increased again. The ECB, at this stage, is likely to maintain a tightening bias, but not signal that a rate increase is imminent.
The dollar challenged levels above 116.0 against the yen in early European trading on Tuesday and strengthened further in New York with highs above 116.70. The Euro was unable to hold above 165.0 against the yen.
There will still be caution over selling the currency with speculation that Europe will push for stronger Asian currencies at G7 meetings later this month. There will also still be unease over underlying credit market conditions as money-market interest rates remain at elevated levels and volatility is liable to increase.
Sterling conditions have remained choppy over the past 24 hours with the UK currency seeing selling pressure above the 2.04 level against the dollar while there was resistance below 0.6950 against the Euro.
The CIPS index for the services sector weakened to 56.7 in September from 57.6 the previous month which was a 12-month low for the index while the prices index was slightly stronger. Other surveys suggested an improvement in consumer confidence, although it was mainly compiled before the Northern Rock difficulties, while other surveys suggest that prices remained subdued.
The Bank of England will announce its latest interest rate decision on Thursday and the most likely outcome is that rates will be left on hold. There is, however, the strong possibility that at least one member will vote for a rate cut and there is a small chance that there will be a majority for a cut in rates. Any reduction would tend to put Sterling under fresh selling pressure as a cut is not priced in.
The Swiss currency weakened to lows around 1.6670 against the Euro on Tuesday while the franc was unable to break back below 1.17 against the dollar. The US currency pushed back to 1.1790 in US trading following the US data releases.
Levels of risk tolerance will remain an important short-term factor and the franc will tend to weaken if risk appetite remains higher. The ECB policy will be watched closely on Thursday and an ECB shift away from a tightening bias would provide important franc support.