EUR/USD
The Euro found support on dips below 1.33 against the dollar in European trading on Wednesday and rallied to a high near 1.3370 before selling pressure resumed with a fresh test of important technical support below 1.32 late in the US session.
The Euro-zone developments remained under close scrutiny and the Euro lost support following a warning from ratings agency Moody’s that the Spanish credit rating was on negative watch due to a rising debt burden and financing concerns. Markets will remain extremely sensitive to the contagion threat within the Euro-zone area given fears over the long-term Euro outlook.
The EU summit will be watched very closely on Thursday and Friday with the German stance a particular focus. The Euro may gain some degree of support if there are public expressions of support for the currency and Euro support fund. Any public divisions would certainly trigger further stresses and there will also be fears that the background German tone will be much less supportive of the Euro. Volatility will remain an important risk over the next few days, especially with liquidity generally thinner on seasonal grounds.
The US growth-orientated data continued to offer some degree of support with industrial production rising 0.4% for November while the New York manufacturing index rose strongly back into positive territory with a reading of 10.6 for December. The consumer inflation reading was benign with a 0.1% reading, but there was still a rise in US Treasury yields to a 7-month high of 3.56% which helped underpin the dollar. The Euro consolidated just above 1.32 against the dollar in Asia on Thursday.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar found support on dips towards 83.50 against the yen on Wednesday and strengthened steadily during the US session. The trends in US Treasury markets remained important with the dollar continuing to gain support from a rise in yields and there was a test of resistance above 84.20 in Asian trading on Thursday.
There has been some downward pressure on global stock markets which should offer some degree of yen protection and there will still be a lack of confidence in the Euro-zone outlook which will maintain the potential for capital repatriation from the Euro by Japanese institutional investors. Exporter selling is also likely to be a feature above the 84 level and resistance levels may be tough to break down.
Sterling
Sterling was unable to extend a recovery above 1.5750 against the dollar in Europe on Wednesday and then weakened steadily during the session with 2-week lows below 1.5550.
The UK unemployment claimant count was close to expectations with a slight decline for November, but the ILO-based unemployment data was weaker than expected with an increase to 7.9% from 7.7%. The data overall should not cause undue alarm in isolation and the latest CBI retail sales report was at the strongest level since 2002.
Nevertheless, there will be fears over the 2011 outlook and Sterling has lost support over the past few days. In this context, the UK currency weakened to 3-week lows near 0.8550 against the Euro which suggests that there may have been underlying capital flows from the UK. Selling pressure will certainly intensify if there are any renewed stresses within the domestic banking sector.
Swiss franc
The dollar retreated to lows below 0.96 against the franc on Wednesday with the Swiss currency gaining strong support on the crosses as it briefly strengthened to a record high against the Euro near 1.2750. The franc also reached a record high against Sterling before retreating slightly in late US on Wednesday.
There will be the risk of further high volatility over the next 24 hours, especially as the EU Summit and Swiss National Bank monetary policy meeting could trigger substantial moves in the franc. The bank will be sensitive to issues of franc strength and this will probably prevent any interest-rate move, but a surprise outcome on rates or currencies is certainly an important possibility. The dollar recovered to the 0.9675 area against the franc on Thursday.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar hit resistance just above 0.9950 against the US dollar on Wednesday and retreated sharply in US trading with lows below 0.9850 as volatility levels remained higher. There was a general recovery in the US currency while risk appetite was dampened slightly by a decline in global stock markets.
Domestically, there was some speculation that the Reserve Bank could increase interest rates again during 2011, but the currency failed to gain any notable support as the currency remained vulnerable on valuation grounds.
