EUR/USD
The Euro probed resistance levels above the 1.2450 level against the US dollar in early European trading on Monday, but was unable to sustain the advance and drifted back to just below the 1.24 level.
Initial gains following the Chinese currency move faded even though international risk appetite was still generally stronger. ECB President Trichet stated that there could be tougher penalties on governments who broke fiscal rules and this reminded investors that there were still important structural vulnerabilities within the Euro area. There was also a downgrading of BNP Paribas’ credit ratings which reinforced fears over the European banking sector.
The German IFO data will be watched closely on Tuesday and a sharper than expected decline in business confidence would tend to reinforce fears over a renewed downturn within the Euro-zone economy during the second half of 2010.
There were no significant economic data releases during the day and attention will tend to focus on the Federal Reserve interest meeting on Wednesday. Confidence in the US economy has dipped slightly and there will be fears over a second-half deterioration which will reinforce expectations that the Fed will not be in a position to tighten policy in the near term. In this context, the dollar will struggle to gain independent support.
There could still be defensive demand if there is a deterioration in confidence surrounding the global economy and the Euro weakened to lows near 1.23 in US trading with weakening confidence on technical grounds.
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Yen
There was confidence in the regional economy and currencies following China’s currency move and this helped underpin the Japanese currency. The dollar dipped to the 90.25 area against the yen on Monday before strengthening to the 90.70 area as improved risk appetite curbed demand for the yen.
The dollar pushed to a high near 91.45 against the yen in Europe on Monday, but was unable to sustain the advance as equity markets failed to sustain an initial advance and the yen consolidated near 91 later in New York.
Sterling
Sterling tested resistance levels above 1.4920 against the dollar on Monday, but was unable to break these technical levels and edged weaker during the European session.
As the initial rally in equity markets faded, Sterling lost any momentum and losses accelerated in the New York session with lows just below 1.4750 against the US currency. The Euro was trapped within a relatively narrow range around 0.8350.
The UK budget statement will be watched closely on Tuesday and it is certain that there will be a combination of spending cuts and tax increases to start bringing the government deficit under control. A harsh budget should be priced into Sterling markets and the government stance on growth and deficit forecasts could be important in determining confidence levels surrounding the UK economy and Sterling.
The currency will tend to come under pressure if there is there a generally downbeat assessment of prospects by the Chancellor.
Swiss franc
The dollar found support close to 1.10 against the Swiss franc on Monday and strengthened gradually to a high to 1.1130 during US trading. The Euro was unable to make any progress against the franc with a test of support below 1.37 and this continued to provide some degree of underlying support to the Swiss currency.
There was still an underlying lack of confidence in the Euro-zone economy and this will continue to provide some degree of support to franc.
The comments from National Bank officials continued to suggest that the bank was less concerned over the threat of deflation with Jordan commented that the risks of deflation had largely disappeared for now. These comments will also lessen pressure for the central bank to intervene and will provide near-term support to the franc.
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Australian dollar
The Australian dollar pushed to a high just above 0.8850 against the US currency during Monday as risk appetite remained stronger following the Chinese currency move. Gold and commodity prices were stronger which helped provide support for the Australian currency.
The currency was unable to sustain the advance and edged weaker to the 0.8775 area later in the US session as equity markets also failed to sustain initial gains while there were some further doubts surrounding the domestic economy.
