EUR/USD

The Euro hit resistance close to 1.2750 against the dollar on Thursday, but found support below 1.27 as consolidation was the dominant feature after heavy volatility earlier in the week. Stronger than expected demand in the latest Irish bond auction also provided some degree of relief for the currency even though underlying structural fears persisted.

The latest US jobless claims data was slightly better than expected with a decline to 473,000 in the latest week from a revised 504,000 previously. There will be some relief that the immediate deterioration in data has been stemmed, but there will still be expectations of a soft labour market and underlying confidence towards the economy will remain weak.

The second-quarter GDP revision will be watched closely on Friday and markets have priced in a sharp downward revision following the recent data. In this context, market fears may not escalate further unless the data is extremely weak with forward-looking indicators such as the PMI data important next week.

Markets will also remain on high alert for comments from Fed officials with Chairman Bernanke due to make a potentially important speech later on Friday. Suggestions of more aggressive quantitative easing would tend to trigger renewed selling pressure on the US currency, although Bernanke will be reluctant to make definitive statements at this time. The Euro consolidated close to the 1.27 level in Asian trading on Friday.

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Yen

The dollar was unable to push above the 85 level against the Japanese yen during Thursday as there was evidence of selling pressure close to this level, especially with exporters needing to sell ahead of the month end.

The domestic economic data did not have a major influence with the inflation data close to expectations as there was a 1.1% core decline for prices in the year to June while unemployment declined to 5.2% from 5.3%. Underlying deflation fears will persist and there will be pressure for the Bank of Japan to resist yen appreciation.

There has been no Bank of Japan intervention over the past 24 hours and without action selling pressure on the dollar could return quickly. Nevertheless, there will be caution during Friday in case G7 make decisive statements over the weekend and the dollar drifted lower to the 84.40 area.

Sterling

Sterling strengthened to attack resistance levels above 1.5580 against the dollar on Thursday, but was unable to break above this level and retreated to the 1.5520 area as the Euro found support close to 0.8150. The UK currency gained some degree of support from a stabilisation in risk appetite, but there was still selling interest at higher levels.

Sterling gained some support from a stronger than expected CBI retail sales survey which strengthened to a 3-year high. There were still important doubts whether the improvement would be sustainable given the underlying pressures on incomes.

The second-quarter GDP data revision will be released on Friday and any downward revision would have some negative impact on confidence, although the impact should be measured given that the original releases was much stronger than expected. There was further resistance close to 1.5580 in Asian trading on Friday.

Swiss franc

The Euro was unable to break above 1.31 against the franc on Thursday and weakened back towards the 1.30 level even though international risk appetite was generally firmer. The dollar was generally on the defensive and edged lower towards the 1.0220 region.

Underlying confidence in the global economy remains very fragile and underlying demand for the franc is likely to remain firm unless there is a sustained improvement in risk appetite.

Markets will remain on alert over possible National Bank action to curb franc appreciation after rapid gains even if the bank decides that a policy of sustained appreciation is unrealistic.

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Australian dollar

The Australian dollar resisted a further test of support below 0.88 against the US dollar over the past 24 hours, but rallies have remained limited amid a cautious attitude towards risk appetite. Underlying confidence is likely to remain fragile and the Australian dollar currency risks will increase if there is a sustained downturn in commodity prices.

Domestically, there was some speculation that a new General Election may have to be called to break the deadlock and continuing the political uncertainty is liable to have some negative impact on the Australian currency even if the immediate impact is measured.