EUR/USD
The Euro edged higher ahead of the US open on Tuesday, but was unable to move much above the 1.32 level and was then subjected to renewed selling pressure as it dipped to an 11-month low against the dollar.
There were further doubts surrounding last week’s EU Summit with fears that little progress had actually been made. German Chancellor Merkel insisted hat there would be no increase in the ESM fund and markets were concerned that there would be no new mechanisms to help support the Euro-zone economy or alleviate the debt burden. The Greek Finance Minister warned that the budget deficit was wider than expected for the first 11 months of 2011 as recession continued to undermine tax revenue and there was also no deal on a private-sector debt restructuring.
As far as the economic data is concerned, there was a slight improvement in the ZEW business confidence index which maintained some hopes that the German economy would prove resilient.
The US retail sales data was slightly weaker than expected with a headline and core increase of 0.2% for November. Although this dampened optimism to some extent, there was still confidence that the US economy was at least holding its own.
At the latest Federal Reserve meeting, the FOMC was slightly more optimistic surrounding the economic outlook while expressing expectations that inflation would settle near or slightly below the desired level. There was no policy action and no hint over a move to further quantitative easing although regional Fed President Evans dissented as he wanted additional action. There were also no changes to the communication policy. The Fed was still uneasy over the Euro-zone risks and will be prepared to act as required over the next few months.
The Euro was subjected to further selling pressure following the Fed decision and retreated to lows near 1.30 before a fragile correction attempt.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar found support on dips towards 77.60 against the yen on Tuesday and ground higher to test resistance in the 78 area. The FOMC meeting provided some degree of support for the US currency as the Fed refrained from any further action. There was also strong demand in the latest Treasury auction as the dollar secured defensive demand.
Both currencies tended to move together in line with risk appetite and the yen also secured defensive backing and support on the crosses. There will be further concern surrounding the regional export outlook and this will maintain a high degree of Finance Ministry sensitivity to yen moves. There will be additional pressure for Bank of Japan intervention if the yen strengthens further against regional competitors.
Sterling
Sterling was unable to hold above 1.56 against the dollar on Tuesday and dipped to lows around 1.5450, although it was dominated by wider dollar moves as Sterling challenged fresh nine-month highs against the Euro.
The consumer inflation rate fell to 4.8% for November from 5.0% previously which was in line with market expectations. There will be a sharper fall over the next 2-3 months as last year’s tax increases come out of the annual calculation.
MPC member dale was very cautious over the economic outlook and there will be expectations of further quantitative easing as inflation falls.
In the short term, there will also be the potential for further defensive inflows into the UK bond market, especially with persist fears over Euro-zone credit ratings. Underlying confidence is still liable to be fragile given the underlying lack of confidence surrounding the UK fundamentals with Sterling consolidating below 1.55 in Asia on Wednesday.
Swiss franc
The dollar maintained a strong tone against the franc on Tuesday, strengthening to a peak around 0.9480, which was the highest level since February. The Euro was unable to make further headway and edged back towards 1.23 on wider losses, although it was still broadly resilient.
National Bank policy remained the principal focus ahead of the quarterly monetary meeting on Thursday. A majority of analysts expect the bank to leave interest rates and the minimum Euro level on hold, but there is a sizeable majority expecting the Euro threshold to be lifted and uncertainty remains the dominant feature which will discourage any franc buying. Wider Euro losses should ease pressure on the central bank slightly.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar was unable to extend a recovery above the 1.0150 level against the US currency and it was then subjected to renewed selling pressure with lows below parity for the first time in December.
There was a sharp decline in consumer confidence according to the latest data and Reserve Bank member Battelino also warned that the Euro-zone crisis would have a negative impact on the Australian economy. There will also be fresh concerns over the Asian outlook if there is a weak Chinese PMI release on Thursday and the Australian dollar will find it difficult to make headway if risk appetite deteriorates further.
