Immediate fears over the US financial sector eased during the week and this allowed the relative economic prospects of the US and Europe to become a greater market focus.
The US currency drew support from a sharp decline in oil prices to two-month lows as demand fears increased, but it struggled to sustain the gains as underlying sentiment was still very fragile.
The latest US existing home sales data recorded a decline to an annual rate of 4.86mn in June from 4.93mn the previous month. There was a small increase in inventories while prices edged higher over the month, but recorded an annual decline.
Initial jobless claims were higher than expected at 406,000 in the latest week from 372,000, but continuing claims were lower than expected which cushioned the impact while durable goods orders rose.
The Federal Reserve Beige book reported that growth had slowed somewhat while inflationary pressure was elevated. The report stated that wage pressures were limited with a soft labour market while the residential housing market remained weak.
Regional Federal Reserve President Plosser stated that the inflation rate is too high and that interest rates should be raised sooner rather than later. Plosser is a hawkish member on the FOMC, but markets moved back towards pricing in interest rates during the Autumn with futures indicating a 50% chance of a September increase.
The German IFO index recorded a decline to 97.5 in July from a revised 101.2 the previous month which was the lowest level for three years.
The Euro-zone PMI data was also weak with the manufacturing-sector data weakening further to 47.5 in July from 49.2 previously while the services-sector data also recorded a decline over the month. The one bright element in the PMI data was a stronger than expected figure for the German services sector.
There were serious concerns over the Spanish economy following the collapse of a key construction group which maintained severe fears over the property sector. Markets responded by downgrading the potential for any further increase in interest rates by the ECB.
The seasonally-adjusted current account data recorded a EUR7.3bn deficit for May from a revised EUR1.5bn surplus previously while there was a further outflow of direct investment.
The dollar found support beyond 1.59 against the Euro, but hit tough resistance on a move towards 1.5620.
Source: VantagePoint Intermarket Analysis Software
The yen moves continued to be driven to a significant extent by degrees of risk appetite and a recovery in the US financial sector unsettled the Japanese currency. There was also further evidence of underlying capital flows out of Japan as domestic investors continued to look for higher yields.
Equity and credit fears increased again late in the week which allowed a yen recovery to 106.80 against the dollar. A key feature was evidence of yen selling on rallies with a move back to 107.70 on Friday. The Swiss franc also had a weaker tone, but found support close to the 1.04 level against the dollar.
The Australian dollar hit resistance above 0.9750 against the US currency and, despite the interest in high-yield currencies, weakened to lows below 0.9550 before a tentative corrective recovery.
The currency was undermined by a decline in commodity prices with the sharp drop in gold and copper prices a particularly negative factor. A large increase in bad debt provisions by the National Australia Bank (NAB) was also a negative influence.
The Bank of England minutes from July’s meeting recorded a 7-2 vote for unchanged interest rates. Blanchflower voted for a rate cut due to economic fears while Besley voted for an increase due to fears over inflation and inflation expectations.
The latest retail sales data recorded a sharp monthly of decline of 3.9% which was the sharpest drop for over 20 years. The decline was expected following a surprise surge last month, but the annual growth rate slowed sharply to 2.2%.
The BBA data also recorded a decline in mortgage approvals to the lowest level on record. There was also a downturn in the CBI industrial survey with overall confidence at the lowest level for over six years. GDP growth was recorded at 0.2% for the second quarter from 0.3% previously with annual growth of 1.6%.
Sterling secured a net advance against the Euro over the week, although it retreated sharply from its best levels near 0.7840. The UK currency was also unable to sustain a position above 2.00 against the dollar.
