by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The Euro tested levels above the 1.38 level against the dollar on Monday, but encountered significant resistance above this level and drifted back from a peak around 1.3815 in subdued trading.
Fears over US economic trends will continue in the short term and the Federal Reserve will remain under intense pressure to cut interest rates.
Several Fed Governors made comments on Monday, although most are not on this year’s FOMC rotation. Yellen, for example, stated that there was significant downward pressure on the economy. Fisher stated that the Fed’s actions had yet to be determined, while he remained generally optimistic over the economy. Comments from Fed Chairman Bernanke will be watched very closely on Tuesday, especially as these may be his last comments ahead of the FOMC meeting next week.
The extent of US rate cuts already priced in will continue to provide some dollar protection with markets estimating an 80% chance of a 0.50% cut at next week’s meeting. Some of the more aggressive interest rate expectations may be scaled back slightly following the Fed comments which would limit dollar selling.
French industrial production data was stronger than expected which will provide some Euro support and ECB President Trichet continued to warn over underlying inflationary pressure. There will still be fears over an underlying slowdown in the economy and fresh deterioration in the banking sector which will restrain the Euro.
The yen strengthened to high around 112.65 in early Asian trading on Monday before the dollar was able to stage a recovery back to 114.0. The US currency weakened again as Wall Street came under selling pressure, but resisted fresh lows while the Euro failed to hold above 157.0 against the yen.
Risk tolerances will remain a key short-term factor and underlying fears over credit stresses will continue to provide important yen protection.
Second-quarter Japanese GDP was revised down to show a 0.3% contraction on a sharp drop in investment which will curb yen support. There has been evidence of Japanese retail and institutional yen selling on Monday while the Finance Ministry will consider stronger measures to curb yen buying if there is a dollar slide below 110.0.
The latest IMM data recorded that there was a renewed shift back to a net short yen position which will limit the scope for dollar recoveries.
Sterling again challenged levels above the 2.03 level against the dollar on Monday before drifting slightly weaker in US trading. UK currency moves were correlated with yen trends and an overall increase in risk aversion weakened the UK currency with lows beyond 0.68 against the Euro. Underlying risk aversion will continue to limit near-term Sterling buying support.
Producer prices rose 0.1% in August to give a 2.4% annual increase while there was a 0.5% drop in input prices and tentative evidence that inflation pressure has peaked will tend to lessen Sterling buying support. The UK data will continue to be watched very closely for further evidence on economic trends with the retail sales data likely to be particularly important on Thursday.
Any comments from Bank of England officials will also be watched closely as the bank remains under pressure to ease money-market stresses. Speculation that interest rates have peaked will curb Sterling support and any sustained pressure for a cut would weaken the currency more sharply.
The Swiss currency found support close to 1.64 against the Euro on Monday while the dollar was trapped below 1.19 and unable to regain any significant technical levels after sharp losses on Friday.
Movements in global stock markets will continue to have an important impact and the Swiss currency is likely to gain further important underlying support from elevated risk aversion levels.
There will be further uncertainty over the National Bank interest rate decision this Thursday. The bank’s task is complicated by the fact that meetings are only quarterly and the bank will, therefore, be reluctant to defer a tightening this time.
The Australian currency weakened further in Asian trading on Monday with a drop to lows below 0.82 against the US currency before a tentative recovery. The Australian dollar was undermined by rising risk aversion and pressure to curb carry trades as Asian stock markets fell sharply.
The currency was also undermined by a reported 4.1% drop in August housing finance which raised some fears over the domestic housing sector. Volatile trading will remain a key feature in the short term and the Australian dollar managed to stabilise later in US trading.