The Euro was unable to push back above the 1.41 level against the US dollar on Wednesday and remained generally on the defensive during the day.

Underlying confidence in the Euro-zone economy remained weak with further unease over the debt situation within Greece and further speculation that pressures could spread to other countries with some rumours of a forthcoming debt-rating downgrade for Portugal.

The US housing data was again weaker than expected with new home sales declining to an annual rate of 342,000 for December following a revised figure of 370,000 the previous month. There was evidence that sales demand triggered by tax credits was fading which tended to undermine overall sales and will reinforce doubts over the economy.

As expected, the Federal Reserve left interest rates in the 0.00 – 0.25% range following the latest meeting. The Fed adopted a slightly more optimistic tone towards the economy, but was still very cautious over underlying trends. The Fed also maintained the commitment to maintaining low interest rates for an extended period while there was a promise to gradually withdraw quantitative measures.

The vote was not unanimous as Regional Fed Governor Hoenig dissented with a preference for the extended period references to be removed. The majority will hold sway in the short term, but there will be some speculation over further calls for a less aggressive policy which could provide some limited dollar support.

The US currency strengthened to test Euro support levels below 1.40 following the Fed decision before settling just above this level.


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Risk appetite remained generally weaker on Wednesday with caution surrounding the global economic outlook as there was further speculation over monetary tightening and loan restrictions in China.

Domestically, the latest trade data was slightly stronger than expected with exports rising 12.1% over the year to December. The data will provide some relief over economic trends, but there will still be pressure on the Bank of Japan to curb yen appreciation. With global trends dominant, the yen strengthened to a six-week high against the dollar close to the 89 level while the Japanese currency also strengthened to a nine-month high against the Euro.

The dollar found support close to the 89 level and pushed to a high just above 90 following the Federal Reserve decision. Significantly, the yen lost some ground even though Wall Street was still generally on the defensive.


Sterling held its ground in early Europe on Wednesday with the generally weak Euro helping to support the UK currency on the crosses.

Bank of England MPC member Sentance was optimistic that there would be an upward revision to the fourth-quarter GDP data which boosted Sterling amid expectations that the bank could move to an early increase in interest rates. Nevertheless, Sentance also still voiced some concerns over the economy and there was a high degree of uncertainty in his comments.

The UK currency pushed to a high near 1.6250 against the dollar before retreating to lows near 1.61 while Sterling held firm against the Euro with consolidation around 0.8680. Structural factors remained an underlying negative factor for the UK currency.

Swiss franc

The dollar found support below 1.0450 against the franc during Wednesday and pushed to a high just above 1.0520 following the Federal Reserve interest rate announcement. This was the dollar high seen in December and there was evidence of tough resistance in this region. The Euro was locked into relatively narrow ranges and held just above the 1.47 level during US trading.

There was still an important lack of confidence in the Euro-zone economy which provided further underlying support for the franc.


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Australian dollar

The Australian dollar spiked higher after stronger than expected inflation data with increased speculation that the Reserve Bank would increase interest rates at the February meeting. The currency was unable to sustain the advance and weakened back to the 0.8950 region as risk appetite was generally weaker.

The Australian currency was unable to rally back above the 0.90 level during the day and dipped to a low near 0.8910 following the Federal Reserve statement before a tentative recovery.