EUR/USD
The Euro was generally firmer in the run-up to the ECB interest rate decision. There was strong speculation that the Greek Prime Minister Papandreou would be forced to resign and abandon the referendum plan as internal party dissent intensified and this also helped support the Euro as it would help ease uncertainty.
There was an unexpected ECB interest rate decision with rates cut by 0.25% to 1.25%, the first decline since 2009. Incoming President Draghi justified the cut on the back of a weakening economic outlook and expectations of a mild recession by the end of 2011.
In the press conference following the ECB decision, Draghi adopted a generally orthodox stance on monetary policy. He strongly defended the bank’s current mandate and completely rejected the idea of the ECB being a lender of last resort.
The Euro weakened sharply following the interest rate cut before rallying again later in the US session. Papandreou confirmed that the referendum idea has been abandoned and that he will aim for a new government including opposition parties following the confidence vote on Friday. Italian and Spanish yields also retreated from peak levels, but Italian benchmark yields were still above 6.20% and there were continuing fears surrounding austerity measures within Italy.
The stakes were raised further by an EU threat that any decision to leave the Euro would also be a vote to leave the EU. Although the threat galvanised Greek political support, there will be an increase in underlying fear surrounding the Euro-zone. Political tensions will remain very high with as the government looks to secure opposition support for the loan package with market concerns persisting.
There was a further strong suspicion of capital repatriation by weaker European banks which was putting underlying upward pressure on the Euro despite the severe political and economic stresses.
The US data struggled to gain much market traction with jobless claims falling to 397,000 in the latest week from 406,000 previously while the PMI services index was at 52.9. The latest payroll data will be watched very closely and is liable to spark further near-term volatility, although the underlying impact may be limited with the Euro consolidating just above 1.38 on Friday.
Source: VantagePoint Intermarket Analysis Software
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Yen
The yen was confined to very narrow ranges during Thursday with the US currency securing some support on dips to below the 78 level. There was a further suspicion that the Bank of Japan was buying below the 78 level in order to block yen gains.
The yen will lose some support if there is a sustained improvement in risk appetite, although there will be important underlying stresses given the potential for capital repatriation.
The US payroll data will be watched closely and a stronger than expected figure would provide some degree of support for the dollar on a rise in US yields.
Sterling
Sterling found support on dips to below 1.59 against the dollar on Thursday and pushed back to challenge resistance levels above 1.60 as wider volatility translated into choppy trading.
The latest PMI services-sector report was weaker than expected with a decline to 51.3 for October from 52.9 the previous month. There was an underlying mood of caution within the report and inflation pressures eased, although there was also an improvement in business confidence.
Markets remained extremely anxious over the UK economic outlook, especially given the negative impact of Euro-zone stresses with further fears over recession conditions.
There were defensive capital outflows into the UK currency during the day as Euro-zone stresses continued to dominate during the day. There will still be fears surrounding the threat of capital outflows from the banking sector given the pressure on European banks to raise capital.
Swiss franc
The dollar initially found support below the 0.88 level against the franc on Thursday and rallied to a peak near 0.89, but was unable to sustain the gains and retreated again during the Asian session on Friday. The Euro struggled to sustain any buying support against the Swiss currency.
In comments on Thursday, National Bank member Danthine reinforced the determination to maintain the minimum Euro level and that the franc level was still very strong even with a minimum 1.20 Euro level.
There were also comments that there would be additional steps to protect the economy from franc strength. There will still be the threat of volatile capital flows given stresses within the European banking sector.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
There was further erratic Australian dollar trading on Thursday as the currency was buffeted by international factors. There was a strong recovery from the 1.02 region against the US dollar and a peak around 1.0440 as international risk appetite improved with the currency rebounding again from a sharp drop during the ECB press conference.
In its policy statement, the Reserve Bank confirmed a downgrading of interest rate and inflation forecasts which maintained expectations that there could be further reductions in interest rates.
