EUR/USD
The Euro was unable to push above resistance in the 1.4430-1.4450 zone on Friday and dipped sharply to lows near 1.4325 in New York before rallying again.
There was further relief that the Euro-zone had avoided financial meltdown with Thursday’s emergency deal. Initial enthusiasm waned, however, as yield spreads failed to narrow further and equity markets were generally on the defensive. There were also still underlying longer-term fears over the Euro-zone outlook which tempered any optimism.
Political stresses were an important market factor. German Chancellor Merkel announced that there would be no debate in the Bundestag over enlarged powers for the EFSF until September. Although this lessened the immediate threat of a showdown with opponents of the plan, it increased underlying uncertainty. There were further fears that weaker Euro members would still have insufficient protection if market pressures intensified again.
The US debt talks took over the mantle of main talking point as Republican and Democrat negotiators were still unable to put together a deal which would allow agreement to raise the debt ceiling. Talks between President Obama and House majority leader Boehner broke up in acrimony on Friday night and there was no agreement over the weekend with rival camps promoting alternative plans.
There were increased fears over a US debt default give the proximity of the August 2nd deadline and there were also increased fears over a credit-rating downgrade even if there is some form of deal. Ratings agencies would react negatively to the overall decline in credibility and any compromise to allow only a short-term increase in the debt ceiling would also be treated unfavourably by the agencies. The dollar weakened as Asian markets opened on Monday, but the Euro hit further resistance above 1.44.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar dipped to lows just below 78.30 against the yen during New York trading on Friday before moving back to the 78.55 area on some speculation over a potential US debt-ceiling deal.
The Japanese currency pushed sharply to a high near 78.10 as Asian markets opened on Monday as fears over a US debt default increased following failure to reach a US debt agreement during the weekend.
Finance Minister Noda repeated his warnings that markets would be watched very closely, maintaining some speculation over intervention. The latest speculative IMM data reported an increase in net long-yen positioning which suggests that fears over a US default risk have already increased yen demand. The shift into the yen may lessen the potential for any further near-term gains for the Japanese currency.
Sterling
Sterling hit resistance above 1.6320 against the dollar during Friday, but found support close to 1.6260 as the movements was contained by Euro moves against Sterling on the crosses. There was a brief move to the 1.6340 area as Asian markets opened on Monday due to increased US fears.
There were no UK releases on Friday, but market attention will intensify ahead of the UK GDP data on Tuesday. The latest Hometrack housing-market data recorded a further small decline in house prices for July.
The UK GDP data will be very important for market sentiment on Tuesday, especially with intense debate over the UK economic trends. Sentiment remains very fragile surrounding the UK economy and confidence will certainly deteriorate further if there is a negative GDP reading. If there is a positive reading, there will be some immediate relief and Sterling could also be in a position to gain defensive support from the US debt-ceiling stresses.
Swiss franc
The Euro was unable to break above 1.19 against the franc on Friday and retreated sharply to lows near 1.1720 as optimism surrounding the Euro-zone debt agreement faded and underlying risk appetite also weakened. In this environment, the dollar also retreated from highs around 0.8240 and gapped lower to near 0.8120 in Asian trading on Monday as US debt-default fears increased.
Safe-haven considerations will tend to remain dominant in the short term, but merger-related flows could also be increasingly important for the franc as there will be the potential for further corporate flows out of Switzerland as companies look to expand their overseas presence.
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Australian dollar
The Australian dollar maintained a strong tone on Friday, but hit resistance near 1.0870 against the US dollar and retreated to lows near 1.0810 in local trading on Monday. There was a generally cautious tone surrounding risk appetite which dampened demand for the Australian currency, especially as confidence in the Asian economies has been damaged by uncertainty over China.
There was still solid support for the currency on yield grounds and firm buying support on dips, especially as funds looked for an alternative to the Euro and dollar with the Australian currency also gaining support from strength in gold prices.
