EUR/USD
The Euro hit resistance above the 1.3720 area against the dollar during Wednesday and generally consolidated within narrow ranges. There were reports of option barriers above 1.3725 which made it difficult for the Euro to advance further, but there was still solid buying support on dips.
ECB President Trichet repeated his comments that the central bank would do whatever was necessary to contain inflationary pressures, reinforcing speculation that the bank could move to a tighter policy.
There was some relief that the Irish government managed to win a crucial vote on the 2011 budget and immediate fears surrounding the Euro-zone structural vulnerability continued to ease. There are still very important on-going discussions related to debt restructuring within the Euro area, especially for Greece. There are elements within the German coalition government who believe that a restructuring is inevitable and what a quick solution to avoid a more damaging restructuring later. Underlying tensions will remain a potentially negative Euro factor.
As expected, the Federal Reserve left interest rates on hold in the 0.00-0.25% range following the latest FOMC meeting and, in contrast to 2010 meetings, there was a unanimous vote. The Fed was slightly more optimistic surrounding the economic outlook, but still stated that growth was insufficient to lower unemployment. Interest rates would be maintained at very low levels for an extended period and the overall tone was generally dovish.
The US economic data was slightly stronger than expected with hew home sales rising to an annual rate of 329,000 for December from a revised 280,000 previously. There was a small increase in US Treasury yields which helped keep dollar selling at bay and it found further support beyond 1.37 against the Euro.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar trading sharply weaker against the yen immediately following the Federal Reserve statement on Wednesday with a low near 82.20 before rebounding to the 82.55 area as US Treasury yields moved slightly higher. The Fed statement overall was not strong enough to trigger firm dollar support and the currency drifted back to re-test support levels close to 82.0.
Domestically, there was an increase in the seasonally-adjusted trade surplus for December, but the overall market impact was very limited. Underlying confidence in the economy will remain generally very fragile which will limit yen buying.
Chinese yuan appreciation would ease competitiveness issues, but deflationary pressures will remain an important focus and there will be Finance Ministry opposition to yen gains with further semi-official dollar buying likely to be seen in the 82 area.
Sterling
Sterling maintained a slightly firmer tone ahead of the Bank of England minutes on Wednesday due in part to a corrective recovery from Tuesday’s very sharp losses.
In the minutes, Posen maintained his preference for an expansion of quantitative easing, but Sentence and Weale both voted for an interest rate increase. There was also a general increase in unease surrounding inflation and a rate hike was probably only prevented by the bank’s unwillingness to act in January and shock markets.
The key question for February’s meeting is whether the GDP data and other evidence on the economy will persuade members that an interest rate increase is not needed or whether the important inflation fears will maintain pressure for higher rates.
There was renewed speculation over a rate increase and this helped push the UK currency stronger with a high just above 1.5930 against the dollar. The Euro also hit resistance above 0.8660 against the UK currency.
Swiss franc
The dollar found support on retreats to 0.94 against the franc, but it was unable to move far away from this level as underlying US sentiment remained very cautious. The franc was also able to resist substantial selling pressure against the Euro even though there was Euro support below 1.29.
The US commitment to maintain very low interest rates will help underpin global liquidity which will also tend to support risk appetite and lessen defensive franc demand. The Swiss currency will still gain fresh backing if there are renewed fears surrounding the Euro-zone.
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Australian dollar
The Australian dollar found support near 0.9930 against the US dollar during Wednesday and made a further challenge on resistance near parity, but it was unable to break through and consolidated close to 0.9950.
The Australian government announced that there would be an increased tax levy to help support flood-reconstruction efforts and this had a negative impact on the currency. Underlying risk appetite was still solid which curbed selling pressure on the currency, but there was still uncertainty over Chinese monetary policies which curbed aggressive buying.
