EUR/USD
The Euro found support in the 1.3750 area against the dollar on Friday and rallied back to test resistance levels above 1.38 ahead of the US open. Euro-zone inflation was confirmed at 3.0% for September, limiting scope for ECB action on interest rates.
There was a further mood of cautious optimism surrounding attempts to find a solution to the Euro-zone crisis as officials continued to debate policy options. The Italian government narrowly survived a no-confidence vote.
There were still severe doubts surrounding the Greek situation with doubts over the practicality of suggestions that voluntary haircuts could be increased to at least 50% from the 21% agreed at the July 21 summit. There were also fears of increased protests within Greece as the parliament again looked to find approval for austerity measures. There were reports of at least one PASOK member resigning over the issue. There were also further strains within the Euro-zone financial sector as French yield spreads over German bunds rose to a record high.
At the weekend G20 meetings, there were strong calls for greater Euro-zone leadership, sentiment echoed by US Treasury Secretary Geithner.
The US economic data was stronger than expected with retail sales rising 1.1% for September following a 0.3% gain the previous month while there was a solid 0.6% core increase. The data did help improve sentiment towards the US outlook and also had a significant impact on boosting risk appetite. This second feature proved to be the decisive market influence and there was widespread dollar selling against risk assets following the data.
A small decline in the University of Michigan consumer confidence index did not have a significant impact. The Euro took advantage of the move and pushed to highs near 1.39 to secure the biggest weekly advance since the beginning of 2011 before edging slightly lower on Monday.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar found support near 76.80 against the yen on Friday and edged marginally higher ahead of the US open. The currency gained strong support following the US economic data as US yields increased and the dollar pushed to a high near 77.40 before losing momentum
The US Treasury delayed publication of the semi-annual currency report due to the sensitivity of forthcoming summits and this should provide some small degree of dollar support.
In general, risk conditions will still tend to be dominant and the yen will lose near-term support if risk conditions continue to rally. There was also speculation that the Japanese government would announce fresh measures to weaken the yen during Monday.
Sterling
Sterling was able to consolidate above 1.57 against the dollar on Friday and pushed to challenge resistance levels above 1.58 following the US data. Sterling peaked near a 1-month high of 1.5850, but struggled to sustain the gains and drifted against the Euro.
There were some fears that any increase in IMF funds to support the Euro-zone would require increased UK support for the IMF which could further compromise budget targets.
There were also some media reports surrounding weakness in Royal Bank of Scotland which undermined market sentiment to some extent as any further bailout for the UK banking sector would pose enormous risks to the government’s economic policies.
There were further warnings over the economic outlook during the weekend, but Sterling was able to resist more than a limited a correction as Rightmove reported higher house prices in October.
Swiss franc
The dollar was unable to make any sustained move above the 0.90 level against the franc on Friday and retreated to lows near 0.8910 as wider US losses dominated price action. The Euro remained trapped below the 1.24 level during the day.
There were further concerns over damage to Swiss companies from the strong Swiss currency with fears over further profit warnings from key industrial names and this maintained pressure for further National Bank action to weaken the franc.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar maintained a strong tone during Friday with support below 1.02 against the US currency and a renewed advance in equity markets following the US economic data helped push the currency to a one-month high above 1.0320.
Trends in risk appetite remained extremely important during the day as the currency benefitted from improved confidence and a wider US decline. Caution was evident on Monday and there was a reported decline in car sales, but the Australian dollar was able to resist more than limited selling pressure.
