EUR/USD
The Euro hit resistance above 1.3250 against the dollar in early Europe on Monday and drifted weaker during the session, although markets were again plagued by a lack of direction.
The latest data confirmed that Spain had entered a recession with a first-quarter GDP decline, although the fall was slightly less sere than expected. There were major concerns surrounding the labour market with unease over further protests. The latest Euro-zone money supply data was slightly stronger than expected, but bank lending remained extremely weak and there was heavy buying of peripheral bonds by Spanish and Italian banks following the LTRO operations which reinforced fears over the financial sector.
Markets were subdued by Tuesday’s May day holiday, especially as it could fuel further protests over high unemployment levels. The latest French opinion polls continued to suggest a comfortable lead for Socialist Party candidate Hollande which maintained underlying political uncertainty. German Chancellor Merkel insisted that there would be no shift in policies and that there would be no re-negotiation of the Social Compact.
The latest US economic data did not have a major impact with the latest personal consumption index marginally weaker than expected while income was slightly higher than expected. The latest Chicago PMI index was weaker than expected with a reading of 56.2 for April from 62.2 the previous month as the growth in orders slowed very sharply for the month.
The US currency was still undermined by a lack of yield support and fresh speculation that there could be further quantitative easing. There was also caution ahead of the Friday employment report with some fears that the data could be weaker than expected.
The Euro found some support close to the 1.32 level and edged higher later in the US session with a move back towards the 1.3250 level.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar was unable to gain any fresh traction during Monday as it dipped towards the 80 support level. A break of this level helped trigger fresh US dollar selling and it dipped to lows just below 79.80.
There were uncertainties surrounding the Bank of Japan policies, especially with the complications surrounding the Golden Week holidays. Liquidity conditions will be very thin and there will be the possibility that intervention could trigger a more substantial market reaction.
There will certainly be an increase in political pressure from the Finance Ministry if the yen continues to strengthen. There were no major developments in Asia on Tuesday with a small increase in the official Chinese PMI index helping to keep risk appetite broadly stable.
Sterling
Sterling pushed to a high close to 1.63 against the dollar in Europe on Monday as underlying sentiment remained strong. There was an increase in selling close to this level and it retreated during the remainder of the day as the Euro found support in the 0.8125 area.
The latest Swiss National Bank data showed an increase in reserves held in Sterling which provided underlying support for the UK currency. The National Bank appears to be still intervening to cap franc gains and there will be a further build-up in Euro reserves. There will, therefore, be further potential diversification of these reserves which will keep the Euro weak on the crosses.
Markets were cautious ahead of the UK PMI data which starts on Tuesday, especially as the figures will have a very important impact on Bank of England thinking ahead of next week’s MPC meeting. Sterling drifted back to the 1.6220 region in subdued conditions.
Swiss franc
The dollar pushed towards the 0.91 level against the franc on Monday, but was unable to make any sustained progress as the Euro remained trapped just above 1.2010. The latest National Bank data continued to indicate intervention to prevent franc appreciation.
The fact that the Euro has been unable to move stronger over the past month suggests that there is still underlying selling pressure which will continue to test the central bank’s resolve. Any further increase in Euro-zone tensions could put the 1.20 minimum level under further pressure.
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Australian dollar
The Australian dollar was unable to hold above the 1.0450 level against the US currency and dipped to lows just above 1.04 before finding support. There was a slightly more positive US tone which curbed Australian currency demand and there were strong expectations that the Reserve Bank would cut interest rates.
After drifting near 1.04, the Australian dollar fell sharply to lows around 1.0320 as the central bank cut rates by a more aggressive than expected 0.50%. The bank was concerned over financial conditions as market rates had tightened and a sharp decline in the manufacturing PMI data reinforced concerns that economic conditions were deteriorating sharply.
