EUR/USD
After a sharp decline early in the Asian session on Thursday, the Euro secured a robust recovery and tested resistance levels above 1.40 in European trading.
The Euro-zone economic data did not have a major impact with a firmer than expected reading for the manufacturing PMI index offset by a weaker services sector reading. There will be fears over a further slowdown in the domestic economy as fiscal tightening takes effect and this will increase pressure for Euro gains to be resisted as European economies will be looking to maintain export-sector growth. ECB member Noyer stated that there was no problem with the Euro’s current valuation which will dampen expectations of aggressive EU action to curb the Euro’s value.
Global currency policies will remain an important focus with an initial concentration on the G20 meetings which started on Friday. The evidence from leaked communiqués suggests that there will be agreement to refrain from competitive undervaluation while there is unlikely to be support for US suggestions that there should be numerical targets for current account balances.
Markets will remain on high alert for comments from US Treasury officials to assess whether there is further verbal support for a stronger US currency. The dollar will need strong and sustained rhetoric to reverse negative sentiment.
The US data had a small positive impact on the dollar with jobless claims declining to 452,000 in the latest week from 475,000 previously while there was a recovery in the Philadelphia Fed index to 1.0 from -0.7 previously. The dollar will gain some support if expectations over the sixe of Fed quantitative easing are scaled back, but it will be difficult to make much headway. From highs near 1.4050, the Euro retreated to just below 1.39 before finding support.
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Yen
The dollar found support close to the 81 level against the Japanese yen during Thursday, but was unable to secure any renewed momentum and was blocked below 81.50 as buying interest remained limited.
Although the US economic data provided some support for the US currency, expectations of further Federal Reserve action continued to limit any potential yield support and also stifled dollar support. Any agreement within the G20 countries to maintain currency ranges could provide some degree of dollar relief while any evidence of serious friction would risk heavy yen buying early next week.
There were no major fresh incentives in Asia on Friday with the dollar still pinned close to the 81 level.
Sterling
Sterling was unable to make a fresh challenge on resistance levels above 1.5850 against the US dollar on Thursday and maintained a generally weaker tone during the day.
The UK retail sales data was weaker than expected with a 0.2% decline for September following a revised 0.7% fall the previous month. Although industry surveys have tended to suggest a more optimistic outlook, underlying confidence surrounding the economy will remain weak.
In this environment, there will be further expectations of additional quantitative easing by the Bank of England. Medium-term bond yields remain at extremely low levels which will tend to undermine capital flows into the UK. Any evidence of a much sharper slowdown in the economy would also tend to unsettle investor confidence in fiscal policies.
Sterling weakened to re-test support levels below 1.57 against the dollar before finding some degree of support while the Euro hit tough resistance close to 0.89.
Swiss franc
The franc maintained a generally weaker tone on the crosses during Thursday with the Euro advancing to a 2-wek high above 1.35 before stalling. The US currency was able to find support on dips towards the 0.96 area and re-tested resistance just above 0.97 in Asian trading on Friday.
The franc could lose some defensive support if there is an easing of friction surrounding global currency markets, but underlying confidence in the global economy is liable to remain weak and there will still be underlying defensive support for the franc on expectations that other central banks will pursue additional quantitative easing.
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Australian dollar
The Australian dollar hit resistance close to 0.9880 against the US currency on Thursday and then retreated sharply in New York with lows near 0.9750 as the US dollar rebounded and there was a deterioration in risk appetite.
There was still firm buying support on dips and the Australian currency will continue to gain support from expectations that global central banks will pursue additional quantitative easing over the next few weeks, especially given speculation that the Reserve Bank of Australia could sanction a further increase in interest rates at the November meeting.
