EUR/USD

The Euro was unable to make a fresh challenge on resistance levels near 1.40 during Tuesday and was generally on the defensive with no support from stronger than expected Euro-zone industrial orders data. The Euro was more vulnerable on technical grounds with a lack of momentum compounded by a firmer US dollar trend.

There were fresh doubts over the Irish economy with fears that government spending cuts would have a negative impact on growth prospects and the banks. There was also a widening of German-Greek yield spreads on renewed medium-term debt-default speculation.

The main focus was still on the US economy ahead of next week’s Federal Reserve meeting with further debate over likely Fed action. There was increased speculation of a more measured tone and there was still some uncertainty as to whether there would be any fresh bond buying at all. There has been an increase in US Treasury yields during the past few days which suggests that the Fed may have had some success in lessening deflation fears.

The US economic data did not have a major impact with consumer confidence rising to 50.2 for October from a revised 48.6 previously while house prices rose slightly in August.

The Euro lost support close to 1.39 against the dollar and dipped to lows near 1.38 on Wednesday with players looking to target rumoured option positions close to this level.

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Source: VantagePoint Intermarket Analysis Software

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Yen

The dollar found support close to 80.50 against the yen on Tuesday, strengthening to the 81 area ahead of the US open. A break above triggered stop-loss buying and the currency rallied to a high above 81.70 in Asian trading on Tuesday.

There was a significant rise in US Treasury yields which helped underpin the currency and there was a reluctance to extend long yen positions given the potential for Bank of Japan intervention. Markets will continue to monitor official comments and actions closely to see whether there is any effort to generate momentum for a stronger dollar via intervention.

Risk appetite was generally more fragile on Wednesday an the Australian currency also declined sharply following weaker than expected inflation data and this may provide some yen support.

Sterling

Sterling moved higher ahead of the GDP data on Tuesday with some speculation over a stronger than expected figure. In the event, the data was even stronger than the rumours with a 0.8% third-quarter expansion compared with expectations of a 0.4% gain.

The data eased immediate concerns over the growth trajectory and lessened speculation over an immediate Bank of England move to boost the quantitative easing programme. Confidence is liable to be fragile and there are still very important risks over the next few months as fiscal tightening saps confidence. Business confidence surveys will be watched very closely next week and a sharp slowdown would undermine sentiment.

Sterling also gained support from a fresh report by ratings agency Standard & Poor’s. The UK AAA rating was affirmed and the negative outlook was also revised to stable following the government’s committed stance on spending restraint. Sterling strengthened to a high near 1.59 against the dollar before a retreat to 1.58 as the US currency secured a wider advance while Sterling rallied strongly to a high near 0.8725 against the Euro.

Swiss franc

The dollar found support close to 0.97 against the franc on Tuesday and then advanced strongly with a high near 0.99 on Wednesday. The Euro also recovered from lows near 1.3555 with a move to 1.3650 despite general Euro vulnerability on the crosses.

Weaker domestic economic data has undermined confidence in the franc and there is also a suspicion that the National Bank is covertly helping to push the currency weaker.

Any improvement in US yields could dampen demand for the franc, although there will still be some significant underlying defensive support.

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Source: VantagePoint Intermarket Analysis Software

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Australian dollar

The Australian dollar hit resistance above 0.9920 against the US dollar on Tuesday and drifted weaker to the 0.9850 area, primarily due to the firmer US currency.

The Australian currency fell sharply following the latest consumer inflation data with a headline reading of 0.7% compared with expectations of 0.8% while the core rate dipped to a five-year low. There was a significant adjustment in interest rate expectations following the data with the chances of a November increase cut to below 30% from near 50%.

This shift in expectations pushed the currency sharply lower to near 0.9710 and the magnitude of the move also suggests that the currency was already vulnerable to a sizable correction.