EUR/USD

The Euro moved higher in early European trading on Tuesday with a challenge on resistance levels. An initial break above the 1.2380 area pushed the currency to a high above 1.24 and there was a further attack on resistance levels ahead of the US open with a peak in the 1.2485 area.

There was continuing speculation that the ECB was set to intervene aggressively in order to push peripheral Euro-zone bond yields down. There were further media reports that the ECB had the backing of the German government and would also be prepared to over-ride Bundesbank opposition to the plans. There was a decline in yields at the latest Spanish bill auction as overall sentiment remained stronger.

There was still a high degree of uncertainty surrounding the situation with markets far from confident that the ECB would be able to secure all the conditions needed for intervention. There were also further fears surrounding the Euro-zone outlook. There were reports that capital was still flowing out of the Euro area which had some impact in undermining sentiment. Markets remained cautious over the Greek situation with Prime Minister Samaras due to hold talks with Euro-group head Juncker on Wednesday as the Greece looks to an extension to the austerity plans.

There was an initial advance on Wall Street as it pushed to five-year highs and underlying dollar demand was also undermined by a initial gains in commodity prices.

Regional Fed President Lockhart stated that he was open-minded on the case for further monetary easing, but also stated that there was no deflation threat at present. The dollar index dipped to a six-week low, but did manage to stage a significant recovery later in New York as commodity currencies weakened with the Euro edging slightly lower in Asian trading on Wednesday.

Yen

The dollar initially held a solid tone in European trading on Tuesday and pushed to highs just above the 79.50 level. Failure to break high, coupled with institutional selling pressure pushed the currency back towards 79.20 as the Euro also failed to hold its best levels.

The yen gained support later in the US session from a more cautious attitude towards risk as equities reversed initial gains.

Growth concerns were important in Asian trading on Wednesday with Japan recording a JPY517bn deficit for July as exports fell by 8.1% over the year with a particularly sharp slowdown in shipments to Europe. The yen maintained a solid tone on caution over risk, but there will be important pressure for currency gains to be resisted given competitiveness issues.

Sterling

Sterling held above the 1.57 level against the dollar in early Europe on Tuesday and pushed strongly higher with a three-month high ahead of the US open. Sterling was less robust against the Euro as it retreated to lows beyond 0.79 against the Euro.

The latest government borrowing requirement was weaker than expected with a reported deficit for July compared with expectations of a small surplus. July is traditionally a strong month for the public finances due to a heavy schedule of corporate tax revenues, but receipts were disappointing. Excluding one-off receipts, borrowing increased to GBP44.9bn for the first four months of the year compared with GBP35.6bn the previous year.

There will be increased pressure on the government for a shift in policies and there will also be increased fears over the AAA credit rating as debt levels continue to rise sharply. From a peak above 1.58, Sterling drifted weaker later in the New York session.

Swiss franc

The dollar lost support in the 0.97 region against the franc on Tuesday and retreated sharply to lows around 0.9620 ahead of the US open as the US currency was subjected to wider selling pressure.

Interest rates remained below zero in the latest Swiss bill auction which suggests that there is still a high degree of defensive demand for the Swiss currency despite increased speculation that there would be ECB intervention to protect the Euro-zone. Euro-zone talks will be watched very closely over the next few days.

Australian dollar

The Australian dollar gained support from wider US vulnerability during the European session on Tuesday and pushed to highs in the 1.0520 region. It was unable to sustain the advance despite a solid tone in commodity prices and retreated back to the 1.0475 region later in the New York session.

There was a further retreat in the Australian currency during Asian trading on Wednesday with lows below 1.0440 as regional growth concerns persisted.