EUR/USD
The Euro consolidated just above the 1.37 level against the dollar ahead of the key data on Friday after failing to break above the 1.3750 level.
The headline US GDP growth was slightly weaker than expected with an annualised rate of 3.2% compared with 2.6% previously. There was a strong reading for consumer spending and final sales increased at an annual rate of 7.1%, but the figure overall was dragged down by a decline in inventories. There will be expectations that inventories will be re-built which would boost growth.
As far as the Euro-zone is concerned, there were further pledge of strong Euro support from German Chancellor Merkel. There are still very important reservations over the underlying Euro-zone fundamentals and confidence is likely to be extremely fragile. There will be further speculation over a medium-term Greek debt restructuring and continuing fears that there is no strategy to allow weaker economies to escape from recession even if debt-servicing costs are cut.
The Euro will be much more vulnerable to selling pressure when there is a deterioration in risk appetite and, in this context, the Euro was undermined by tensions within Egypt. Following an escalation in street protests, there were increased fears that unrest would spread to other parts of the Middle East. There has been a strong flow of funds into emerging markets as a symptom of ultra-loose G7 monetary policies and any reversal in these flows which would provide important safe-haven demand for the US currency.
The Euro weakened to lows below 1.36 later in US trading on Friday and remained generally on the defensive on Monday despite further speculation over sovereign Euro buying.
Source: VantagePoint Intermarket Analysis Software
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Yen
After a sharp drop towards support near 82, the dollar was unable to regain any momentum against the yen ahead of the Friday US GDP release and was subjected to renewed selling pressure following the data as US yields declined.
Trends in risk appetite will remain important in the short term and the Japanese currency will gain important support when risk conditions deteriorate. In this context, the yen will gain support from stresses within the Middle East.
The yen maintained a generally strong tone on Monday and a larger than expected industrial production increase of 3.1% will trigger some degree of optimism over the economy. There is still likely to be strong opposition to yen gains within the Japanese Finance Ministry and there were further reports of semi-official dollar buying close to the 82 level.
Sterling
Sterling volatility was still high on Friday even though attention was focussed more on risk trends and the US economy. The UK currency hit resistance just above 1.5950 against the dollar and then weakened sharply to lows near 1.5820 in New York as the US currency rallied strongly. Trends in risk appetite will continue to be watched closely and Sterling will be more vulnerable to selling pressure if there is a general deterioration in risk conditions.
Overall confidence in the UK economy will also remain weaker following the GDP data released last week. In this context, the PMI business confidence surveys will be very important for sentiment over the next few days. A recovery in the services-sector reading would lead to some relief that the fourth-quarter data was distorted. Overall confidence is still likely to be fragile given fears that the fiscal tightening will have a further adverse impact on confidence and demand within the economy.
Swiss franc
The dollar was unable to break above 0.9470 against the Swiss franc on Friday and as generally weaker in US trading despite a notable advance against the Euro.
The franc gained strong support on the crosses with a test of support below 1.28. There was a significant deterioration in risk appetite as fears increased over the situation in Egypt and this was important in boosting defensive franc demand.
The situation within the Euro-zone will also be watched closely and a further widening of credit-default swaps would also boost defensive demand for the franc.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar was blocked close to 0.9975 against the US dollar on Friday and weakened to lows near 0.9920 in New York. The currency was undermined by a firmer US currency and a deterioration in risk appetite with the Australian dollar also opening sharply lower in Asian trading on Monday. There was a slide to 0.9870 before a recovery to the 0.9945 area as there was still firm buying support on dips.
There will be concerns over commodity-price trends and this will tend to weaken investor demand for the Australian currency.
