EUR/USD
The Euro drifted weaker ahead of the ECB council meeting on Thursday, dipping below the 1.3850 level against the dollar. The ECB interest rate decision was in line with expectations as rates were left at 1.0%. The comments from Bank Chairman Trichet also suggested that rates would be left on for the next few months.
The comments on monetary policy tended to be overshadowed by budget and debt fears surrounding the weaker Euro-zone economies with a further focus on the Greek situation. Trichet commented that many member countries had large and sharply-rising fiscal imbalances which did little to bolster investor sentiment towards the region.
During the New York session, there was a wider deterioration in risk appetite as equity markets came under significant selling pressure. The lack of confidence was fuelled in part by fears surrounding possible sovereign debt defaults and, with the dollar gaining defensive support, the Euro was subjected to renewed selling pressure.
The US jobless claims data was higher than expected with an increase in initial claims to 480,000 in the latest week from 472,000 previously. The data created some doubts over Friday’s monthly payroll data, although the correlation is not always strong. There is also a greater mood of uncertainty given that there will be annual benchmark revisions released with Friday’s data.
It is possible that the dollar will gain on strong or weak data as a worse than expected report would undermine risk appetite while a strong report would boost US yield prospects. As fear dominated, the Euro dipped to fresh 8-month lows below the 1.37 level in Asian trading on Thursday before a limited correction.
Source: VantagePoint Intermarket Analysis Software
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Yen
Trends in risk appetite have tended to dominate the yen over the past 24 hours and the Japanese currency has gained strong support from a deterioration in global confidence. Equity markets have been subjected to strong selling pressure while there has also been a sharp retreat for commodity prices which curbed demand for carry trades.
The yen strengthened to highs beyond 89 against the dollar and also strengthened to near 122 against the yen. US Treasury Secretary Geithner’s comments that the yuan could strengthen soon also boosted the Japanese currency.
There was evidence of importers selling the yen which helped the dollar rally back to the 89.60 region. There will also be pressure for the Bank of Japan to curb yen gains and there is the potential for some verbal intervention, especially if volatility continues to increase.
Source: VantagePoint Intermarket Analysis Software
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Sterling
Sterling drifted weaker against the dollar ahead of the Bank of England interest rate decision on Thursday, primarily due to a firm underlying US tone.
The MPC left interest rates on hold at 0.50% and also decided to halt the GBP200bn quantitative easing programme. The decision was in line with market expectations, but there had been some speculation over a further expansion of the bond-buying programme and there was an initial Sterling rally following the decision.
Policy uncertainty will continue to be a key market feature, especially as the bank stated that it could re-consider the policy if the economic recovery faltered. There will also be some risks of capital outflows which could undermine Sterling.
Overall confidence in the government-debt situation will also remain weak and the general increase in fears surrounding sovereign debt ratings will also tend to be a negative market factor for Sterling
As risk appetite deteriorated, Sterling dipped to lows below 1.5730 against the dollar, but held a firm tone against the Euro.
Swiss franc
The dollar edged above the 1.06 level against the franc on Thursday ahead of the central bank interest rate decisions and pushed sharply higher to a peak near 1.08 later in the US session. Despite weakness against the dollar, the franc maintained a very firm tone against the Euro.
A renewed Euro decline below the 1.47 level and a brief slump to below 1.46 triggered strong speculation over intervention by the National Bank and the Euro pushed sharply higher in Asian trading.
The Swiss currency will tend to gain important defensive support on a deterioration in risk appetite and wider fears over the threat of sovereign debt defaults.
Australian dollar
The Australian dollar lost support near the 0.88 level against the US currency on Thursday and was then subjected to further selling pressure during the day. As equity markets declined sharply and commodity prices also retreated rapidly, selling pressure on the Australian dollar increased.
The currency dipped to lows just below 0.8650 against the US dollar before finding some degree of support. A slightly more optimistic central bank report on the economic outlook did not have a significant impact as risk conditions tended to dominate.
