EUR/USD
The Euro was blocked in the 1.2520 region early in Europe on Wednesday and was unable to gain any buying support with a further test of support below 1.2450 later in the day.
There were further concerns surrounding the economic outlook as the Bank of Spain warned that the economic contraction would be more severe in the second quarter than the first quarter. Without growth, the banking-sector difficulties will intensify. Following official request for funds, the Spanish bank bailout was likely to be in the region of EUR50bn which was lower than initially feared, but estimates could increase rapidly. Spanish Prime Minister Rajoy again called for liquidity to be improved as internal stresses continued to increase.
Greek PASOK leader Venizelos also stated that the Greek situation was still deteriorating. There was continued speculation that the ECB would cut interest rates at the July meeting, especially with officials mooting that the deposit rate could be cut to near zero. Nevertheless, there was also pressure for more aggressive action given the impact of a small rate cut was likely to be very limited.
German Chancellor Merkel maintained her opposition to Eurobonds in a speech to parliament, maintaining a hard-line stance ahead of the EU Summit which starts on Thursday. Market confidence surrounding the two-day meeting remained very weak, although there was also some caution over selling the Euro aggressively given the possibility of surprise action.
The headline US durable goods increase was marginally firmer than expected at 1.1% while there was a core increase of 0.4%. There will be some relief following a series of weaker than expected reports, but little optimism surrounding strong gains in investment. The pending home sales data was stronger than expected with a 5.9% monthly increase, maintaining a greater degree of optimism surrounding the housing sector.
The Euro again found some support below 1.2450 as the US currency found it difficult to gain overall momentum and pushed to highs above 1.25 in Asia on Thursday with a covering of short positions ahead of the EU Summit.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar found support below 79.50 against the yen on Wednesday and, after little change following the US durable goods data, the US currency gained some support from the pending home sales data and pushed to highs above 79.80 as equity markets also rallied.
There were expectations of substantial sell orders on any approach to the 80 level and the US currency drifted weaker later in New York as it was unable to make a serious test of resistance. The domestic data recorded a slightly stronger than expected retail sales increase of 3.6%, although the impact was limited. There was still little evidence of wider yen selling pressure even though risk conditions were slightly more favourable with the dollar edging back to below the 79.50 level.
Sterling
Sterling was unable to hold above 1.56 against the dollar on Wednesday and dipped to lows just below 1.5550 before finding some degree of support. The latest BBA data recorded a weaker than expected increase in mortgage approvals and there was a decline in net lending for the first time since 1997 as borrowers and lenders remained extremely cautious towards the outlook.
In contrast, there was a much stronger than expected reading for the latest CBI retail sales survey with a reading of 42 for June from 21 in May. There was speculation that the data had been distorted by the Diamond Jubilee holidays and the July data will be watched closely to see if momentum can be sustained. Markets will also look to assess whether there is any change in rhetoric from the Bank of England, but expectations of further quantitative easing are likely to continue for now. Sterling was unable to regain the 1.56 level as the Euro rallied to above 0.86.
Swiss franc
The dollar nudged higher during Wednesday as it again probed resistance levels close to 0.9650 against the franc, but it was unable to reach new highs for the month. The Euro was trapped close to 1.2010 as movement remained extremely limited.
National Bank member Danthine’s comments on the franc on Thursday were in line with recent comments as the Euro minimum level was described as an absolute necessity. Any disappointment surrounding the EU Summit would risk a further increase in capital flows into the Swiss currency and keep the central bank under pressure.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar found support on dips to below the 1.0050 level during Wednesday and held a slightly firmer tone during the day. There was underlying support from gains in commodity prices as gold reversed initial losses to trade higher.
Although there was still a high degree of caution surrounding the global economic outlook, the Australian currency pushed to highs above 1.0120 against the US currency with some speculation that the currency was benefitting from reserve diversification into the currency. There was a further small increase in new home sales which provided some degree of support.
