EUR/USD
The Euro found further support near 1.2650 against the dollar during Wednesday and strengthened to above the 1.2750 level ahead of the US economic data releases with reports of Far East central bank Euro buying providing some underlying support.
The US ADP employment report was weaker than expected with a reported decline in private-sector jobs of 10,000 for August after a revised 37,000 increase for July. The data will reinforce expectations of a lacklustre payroll report on Friday.
In contrast, the ISM manufacturing report strengthened to 56.3 from 55.5 the previous month even though the regional components had suggested a deterioration in conditions was likely. The manufacturing report proved decisive for market sentiment and there was an important improvement in risk appetite. As US Treasury prices fell sharply and defensive dollar demand faded, the Euro rallied to above the 1.28 level for the first time in two weeks.
There will, however, be fears that the non-manufacturing sectors will drag the economy down and confidence could deteriorate rapidly again.
Markets will also watch the ECB monthly meeting closely on Thursday, especially after recent comments suggesting that additional liquidity measures could be required during the year-end period. If the ECB makes cautious remarks over liquidity and structural issues, then the Euro will be vulnerable to some selling pressure. The Euro edged weaker to test support levels below 1.28 in Asian trading on Thursday.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar found support below 84 against the yen on Wednesday and recovered quickly from a sharp spike lower following the US employment data. The dollar then strengthened to a high above 84.60 following the ISM data as risk appetite improved.
Given the significant gains on Wall Street and improvement in risk appetite, the extent of yen losses was still relatively limited and the Japanese currency regained ground on Thursday.
There have been no major comments from Finance Ministry or Bank of Japan officials over the yen’s level and there will be increased speculation that the authorities have decided against intervention unless there is a fresh surge in the Japanese currency. The dollar drifted back towards the 84 level in Asian trading.
Sterling
The UK manufacturing PMI index weakened to 54.3 for August from a revised 56.9 the previous month and this was a nine-month low for the index.
There will be particular concerns over the manufacturing data, especially as the industrial sector had been providing important support over the past few months. Confidence in the services sector is liable to weaken and the economy will be even more vulnerable if manufacturing also falters.
The improvement in risk appetite did provide some Sterling support, but there was significant selling interest on rallies as underlying confidence remains fragile.
Sterling still found support below 1.5350 against the dollar following the weaker than expected data as the dollar lost defensive support. Sterling peaked close to 1.55, but was unable to sustain the advance and weakened back to below 1.5450 on Thursday with technical indicators still unfavourable.
Swiss franc
The Euro rallied to above 1.30 against the franc during Wednesday as global risk appetite improved, but there were still important doubts over the Euro-zone outlook which limited franc losses. The dollar was trapped below the 1.02 level.
The ECB comments will be watched closely on Thursday and an upbeat assessment by President Trichet would provide some near-term Euro support with some reduction in defensive demand. The most likely outcome is still that a mood of caution surrounding the Euro area and the global economy will prevail which will limit selling pressure on the franc.
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Australian dollar
The Australian dollar continued to advance on Wednesday and pushed to a high just above 0.9110 against the US currency. There was important support from an improvement in risk appetite and gains in commodity prices.
The latest Australian trade data was weaker than expected with a drop in the surplus to AUD1.89bn for August from a revised AUD3.44bn previously and this helped push the Australian currency back towards the 0.9050 region.
Underlying sentiment towards the domestic and global economy is likely to be fragile and a weaker than expected domestic PMI services report would undermine confidence further. In this context, rallies are liable to be brittle.
