EUR/USD
The Euro found support in the 1.2550 region against the dollar on Thursday and rallied during the European session as risk appetite remained generally firmer. There were hopes that the German government would move towards further measures to underpin the banking sector, although official rhetoric continued to suggest that Germany would continue to resist any measures to provide direct support to the banking sector. Merkel notably stated it will back the use of all existing tools.
Fitch downgraded Spain’s sovereign rating by three notches to BBB which is the lowest rating of the major agencies and also maintained a negative outlook. There were further concerns surrounding Spain with fears that the economy was too large for existing mechanisms to deal with.
Fitch also expressed concerns surrounding the US budget outlook and warned that there could be a downgrading of the AAA US rating if there were no cohesive measures to curb the budget deficit over the next few months. US jobless claims fell to 377,000 in the latest week from 389,000 previously which provide some degree of support for US currency on yield grounds.
In congressional testimony, Federal Reserve Chairman Bernanke expressed some concerns surrounding the Euro-zone outlook, but he was relatively calm surrounding the situation. Although he stated that the Fed was prepared to take action if necessary, the underlying message was that the Fed had not made up its mind whether further support measures would be required and there appeared to be little prospect of a short-term plan to expand quantitative easing. Markets had been geared up for a more dovish tone and the relatively neutral stance provided relief to the US dollar as well as undermining risk conditions.
The Euro recovered ground following an initial dollar advance, but it was again unable to sustain a move above the 1.26 level and retreated to test support in the 1.25 area in Asia on Friday.
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Yen
The dollar maintained a solid tone against the yen in Europe on Thursday and pushed to a high around 79.75 before selling pressure increased.
The yen was initially sold as risk appetite strengthened further following the Chinese interest rate cut. There was, however no real follow through to the selling and risk appetite was generally more fragile during US trading as there was renewed caution surrounding the Euro-zone situation.
The dollar gained some support on yield grounds following Bernanke’s testimony, although the impact was lessened by a move into more defensive assets. An upward revision to Japan’s first-quarter GDP data did not have a major impact as it was over-shadowed by a sharp decline in the Nikkei index and a fresh deterioration in risk conditions pushed the US currency to lows around 79.20 on Friday.
Sterling
Sterling was generally on the defensive in early Europe on Thursday before regaining ground with a sharp move higher.
Sentiment was initially supported by a stronger than expected UK PMI services-sector release with the key index unchanged at 53.3 for May. There was also a 0.5% monthly increase in house prices according to the Halifax house price index.
The data dampened any speculation that the Bank of England would sanction further quantitative easing and the central bank indeed left policy on hold with interest rates unchanged at 0.50% while the quantitative easing was also held at GBP325bn. There had been some speculation that the bank could announce further measures and the UK currency gained strongly following the decision with a peak close to the 1.56 level. Sterling also recovered back through the 0.81 level against the Euro.
There was a sharp retreat back to below 1.55 in Asia on Friday as underlying risk conditions tended to deteriorate again.
Swiss franc
The dollar found support above the 0.95 level against the franc on Thursday and although buying support was still measured, the US currency advanced to 0.96 in Asia on Friday with the Euro trapped near 1.2010.
Swiss consumer prices were unchanged for May which was slightly below expectations and reinforced market fears over potential deflationary pressure. The latest National Bank data recorded a sharp increase in reserves to CHF303.8bn for May from CHF237.6bn previously. The data reinforced market impressions that the bank was having to intervene more aggressively to prevent the franc appreciating and also tended to increase speculation that the minimum Euro level could be broken.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar maintained a firm tone in Europe on Thursday and pushed to a high just above parity against the US currency following the Chinese interest rate cut with sentiment also boosted by gains in commodity prices.
The currency was unable to hold the advance and retreated back to the 0.99 area later in the US session with disappointment over Bernanke’s testimony as speculation over fresh action to support the economy faltered.
A trade deficit decline to AUD0.2bn from a revised 1.3bn previously was over-shadowed by weakness in Asian equity markets and the Australian dollar retreated further to lows near 0.9850.
