EUR/USD
The Euro pushed to highs around 1.2330 against the dollar on Tuesday, but after failing to sustain the gains it was subjected to renewed selling pressure during the New York session. The currency derived initial support from a decline in Spanish and Italian bond yields as fixed-income volatility remained very high. The Euro could not derive sustained support from falling yields with the Euro also struggling to gain support when risk appetite improved as the correlation seen over much of the past few weeks tending to break down.
The German Constitutional Court held a hearing over the cases brought demanding an injunction to stop the ESM being ratified. In its opening statement, the Court stated that it would respect the decision of parliament which increased market hopes that the injunction call would be rejected. The German Finance Ministry also warned over the adverse implications of delaying implementation, but the indications later in the day were that a decision could take weeks.
Underlying confidence in the Euro-zone outlook remained extremely weak with disappointment that more radical policy proposals had not been implemented at the Eurogroup Summit. Italian Prime Minister Monti suggested that Italy could look to secure rescue funds for the financial sector.
There were no major US economic data releases with markets taking close note of Federal Reserve comments. Regional president Bullard downplayed the potential for additional quantitative easing, in contrast to more dovish comments from Williams the previous day. The FOMC minutes from June will be analysed closely on Wednesday to assess the relative strength of differing camps within the FOMC and a dovish stance would undermine the dollar.
The Euro weakened to fresh two-year lows around 1.2230 as risk appetite deteriorated again before recovering slightly and consolidating just above 1.2250.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar found support on dips towards the 79.20 area against the yen on Tuesday and rallied to the 79.50 area, although the overall performance remained unconvincing. The Euro retreated to test support near 97.0, the lowest level since early June.
Underlying global risk appetite remained very fragile which continued to curb any yen selling pressure, especially with increased unease over the global growth outlook. Bank of Japan Governor Shirakawa stated that the bank would continue its battle against deflation, but also suggested that no further policy action would be taken at this week’s policy meeting and this was significant in lessening selling pressure on the yen.
Sterling
Sterling traded erratically against the dollar during Tuesday with a sharp retreat after a push to the 1.5550 area followed by a fresh rally later in the US session. Moves against the Euro were particularly significant as Sterling pushed to highs beyond the 0.79 level, the strongest since early 2009.
The latest monthly industrial output data was stronger than expected with a 1.0% monthly gain which provided some relief, especially as the trade data was also stronger than expected as exports strengthened.
The NIESR, however, indicated that GDP dropped 0.2% for the second quarter and Bank of England Governor King maintained an extremely cautious outlook as he warned over the UK implications of sustained Euro-zone weakness.
In this context, Sterling was still dependent on safe-haven inflows to make headway with the domestic fundamentals still very vulnerable. The UK currency consolidated above 1.55 in Asia on Wednesday.
Swiss franc
The dollar found support below the 0.9750 area against the franc on Tuesday and pushed to highs around 0.9810 during the US session as the Swiss currency suffered from the inability to distance itself from the vulnerable Euro.
With the Euro under sustained pressure against the franc, there will be further controversy surrounding the Euro minimum level and the costs of policy implementation as National Bank reserves continue to rise sharply. In this context, there will be calls for additional policies such as negative interest rates or capital controls.
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Australian dollar
The Australian dollar pushed to a peak just above 1.0240 against the US currency before retreating again in choppy trading conditions with a low close to 1.0180. There were further concerns surrounding the global growth outlook which had an important impact in curbing demand for the Australian dollar.
Regional business confidence indicators have also deteriorated which had a negative impact and there was a weak reading for the latest home loans data. Nevertheless, the currency was able to consolidate just above the 1.02 level during the Asian trading on Wednesday.
