EUR/USD
The Euro consolidated around the 1.25 area ahead of Wednesday’s ECB interest rate decision with the currency finding it difficult to translate an improvement in risk appetite into gains. There were persistent fears surrounding Spain as rumours that it was requesting EU aid were denied. In essence, Spanish hopes for direct support for the banking sector are meeting tough resistance by Germany which wants a more conventional support package. The economic data provided no support with German industrial production falling 2.2% for April.
There had been a minority view that the ECB could cut interest rates, but the benchmark rate was left on hold at 1.0% which ensured that principal attention was on President Draghi’s press conference. He stated that downside risks to growth had increased which reinforced a degree of pessimism towards the economic outlook as projections were lowered.
When pressed over the decision not to cut interest rates, Draghi stated that the most recent data weakening had occurred after the latest staff projections had been prepared. He also admitted that the decision to leave rates on hold was not unanimous, increasing speculation of growing internal divisions.
There was no suggestion of additional support measures from the ECB with the onus put firmly back on governments and the Euro initially weakened to lows below 1.2450 against the dollar.
Regional Fed President Lockhart stated that concerns surrounding the US outlook had increased and, although there was no immediate case for additional quantitative easing, he also stated that it could not be ruled out if conditions deteriorated further. Yellen also stated that the case for further action needed to be weighed carefully.
Risk appetite maintained a stronger tone during the US session with markets anticipating support measures from global central banks. There was additional Euro short covering after support levels held and the currency rallied to a peak above 1.2580.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar found strong support in early Europe on Wednesday and pushed to highs around the 79.25 area before hitting resistance as exporter selling also increased.
The US currency proved broadly resilient with support just below the 79 level as the Japanese currency surrendered some defensive support. Immediate yen demand was stifled by an improvement in risk appetite as Wall Street rallied strongly. There was also further speculation over possible intervention as competitiveness fears continued.
The mood of greater optimism was sustained in Asia on Thursday with a reduction in long yen positions and the US currency pushed to a peak near 79.50.
Sterling
Sterling found support on dips towards the 1.5425 area against the dollar on Wednesday and pushed strongly higher to a peak above 1.55 on reports of Middle East buying.
The UK CIPS construction-sector index edged lower to 54.4 from 55.8 the previous month as order growth deteriorated, although there was still no evidence of the type of weakness reported in the official data. The services-sector data due ahead of the rate decision will be important for underlying sentiment.
There was further speculation that the Bank of England could sanction additional quantitative easing at Thursday’s monetary policy meeting and the decision will trigger additional volatility following the decision.
The UK currency gained protection form an underlying improvement in risk appetite and, in this context, the potential Sterling damage from further bond purchases may be limited by expectations that there will be concerted global attempts to boost demand. The UK currency stalled near 1.55 with a BRC retail sales increase of 1.3% for May not having a major impact.
Swiss franc
After finding support just below 0.96 against the franc on Wednesday, the dollar pushed to a high near 0.9645 before faltering again and retreating to lows near 0.9550. The Euro remained firmly on the defensive and edged lower to the 1.2007 area despite an improvement against the US currency.
The lack of fresh ECB support measures for the Euro-zone will maintain fears surrounding potential capital flows in to Swiss assets, especially if Euro-zone policymakers are unable to stabilise the banking sector. This is likely to be masked only temporarily by an improvement in risk appetite.
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Australian dollar
The Australian dollar was able to maintain a more confident tone during Wednesday as it resisted a renewed test of support below 0.98 and pushed to a high around 0.9925 against the US currency. The currency gained important support from an improvement in risk appetite which sapped wider US dollar buying support.
There were also expectations of concerted policy action to underpin global demand which helped support the Australian currency. For the second day running, the domestic data was much stronger than expected with an employment increase of close to 39,000 for May compared with expectations of a small decline which boosted the currency to a peak above the 0.9960 level.
