EUR/USD
The Euro consolidated above 1.2250 in Asian trading on Monday, but struggled to make much headway with gains capped around 1.2330 in subdued trading conditions.
The number of speculative short Euro positions remains at very high levels and this will tend to limit the scope for further aggressive currency selling. There will still be an underlying lack of confidence in the Euro-zone economy and the currency which will limit potential Euro support. In particular, there will be fears over longer-term capital outflows from the region. There was also a decline in the latest Euro-zone industrial confidence indicator.
There were further concerns over longer-term ECB policies as the bank increased its buying of European bonds. Bank President Trichet also warned that the Euro has serious problems with its fiscal rules.
US markets were closed for the Memorial-Day holiday which stifled activity, especially with UK markets also closed.
There will be optimism over near-term US economic prospects, especially if there is a robust reading for the ISM manufacturing report. There will also be confidence in a firm US employment report on Friday which should maintain some support for the dollar.
Regional Fed President Evans stated that the Euro-area difficulties could delay a US interest rate increase somewhat, but markets will still be expecting the US to tighten policy ahead of the Euro area. Chinese officials expressed unease over the risk of a double-dip recession which curbed risk appetite. The Euro consolidated close to 1.23 later in the day.
Source: VantagePoint Intermarket Analysis Software
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Yen
Equity markets proved resilient on Monday and the US currency pushed back to the 91.40 area as month-end exporter dollar selling also faded.
The Japanese currency was unsettled by political considerations as the Social Democrats announced that they would leave the coalition government with a dollar spike above 91.50.
There were no major leads from global equity markets during the day and the dollar was unable to extend gains later in the session as caution was still an important influence. The US currency settled around 91.25 against the yen.
Sterling
Sterling found support on dips to the 1.44 area against the dollar on Monday and rallied steadily during the day with a move to highs around 1.4540 in quiet trading conditions.
Budget policy will remain an important focus during the next few days and weeks. The resignation of Chief Secretary to the Treasury Laws is important as he was due to play a pivotal role in agreeing long-term structural government spending cuts.
There will be increased market unease and greater doubts whether a credible deficit-cutting package will be achievable. In this environment, Sterling sentiment could prove to be very brittle. The manufacturing PMI index will be watched closely on Tuesday to assess the state of industrial activity.
Swiss franc
The dollar found support below 1.1550 during Monday and rallied to a high just below 1.16 as ranges narrowed sharply from recent levels. At one point, the Euro spiked above 1.4250 against the franc, but was unable to sustain the advance and it retreated to lows around 1.4170 before consolidating near 1.42.
There was no evidence of National Bank intervention during the day. The Swiss currency should continue to gain underlying support from a lack of confidence in the Euro-zone economy.
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Australian dollar
There were Australian dollar lows near 0.8430 against the US dollar on Tuesday before a recovery to 0.8480 as international risk conditions stabilised. Confidence in the domestic and international economy is likely to remain more fragile in the short term. Despite optimism over emerging-market growth, there will be an overall sense of caution surrounding the growth outlook within the G7 area and this is likely to limit demand for the Australian dollar.
The currency was unable to make a further attempt at breaking resistance near the 0.85 level and it dipped to lows below 0.8400 later in the day before rallying to the 0.8450 area.
