EUR/USD
The Euro stalled just above the 1.23 level in Europe on Tuesday and edged slightly lower during the session. There was mixed evidence on Spain which tended to curb currency movement. There was a sharp decline in yields at the latest bill auction which helped improve near-term sentiment surrounding the bond market. The Bank of Spain, however, continued to warn over a sharp economic contraction this year and there were also warnings that further bank rescues could be required.
Although yields in core countries edged away from record lows, there was still a high degree of defensive demand which indicated a lack of confidence surrounding peripheral economies and their funding requirements.
The German ZEW index weakened to a six-month low of -19.6 from -16.9 the previous month, although this was slightly better than market expectations and the institute was cautiously optimistic over a potential recovery during 2013.
The US NAHB house-building index rose to 35 from 29 previously, maintaining the recent strong tone while consumer prices were unchanged for the month with a core increase of 0.2% which did not have a major impact.
Principal attention surrounded Fed Chairman Bernanke’s testimony to Congress. The Fed chief was concerned over the labour market and was also less confident in the economic outlook with warnings that there had been a deceleration. Bernanke continued to insist that the Fed had tools available and would take further action if required.
There were no hints of immediate action, but the more dovish underlying tone suggested a shift towards further measures after the Summer if there was no improvement in the labour market. Initial disappointment over a lack of quantitative easing referencing boosted the dollar with the Euro falling to test support below 1.22 before bouncing back to the 1.23 region. The Euro drifted slightly lower in Asia on Wednesday with a lack of fresh incentives.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar found support below 78.90 against the yen on Tuesday and moved higher during the US session, although gained were still limited with resistance near 79.20.
The US currency gained some support from Bernanke’s tone and there was also strong demand for US Treasuries according to the latest data. There was still underlying speculation that the Fed could move to take additional action which stifled yen selling.
There was further speculation that the Japanese Finance Ministry could move to order intervention to weaken the yen which curbed buying support. Nevertheless, the yen was still broadly resilient with limited selling even as Asian equity markets attempted to rally.
Sterling
Sterling tended to drift weaker during the European session on Tuesday. The latest consumer inflation data was weaker than expected with a decline in the annual rate to 2.4% for June from 2.8% previously, the lowest rate for two years. There was evidence that a combination of poor weather and weak demand had pushed retailers into additional discounting which helped keep the rate down.
Sterling weakened immediately after the release before recovering some ground on hopes that consumer spending would be supported by increased purchasing power. The latest unemployment data will be watched closely on Wednesday with the latest Bank of England MPC minutes also due for release and pressure for more action could undermine Sterling. The retail sales data on Thursday and government borrowing release on Friday will also be important for underlying sentiment given fears over persistent weakness in underlying demand.
Sterling retreated to lows near 1.5550 following Fed Chairman Bernanke’s testimony before rallying to the 1.5660 area with consolidation near 0.7850 against the Euro.
Swiss franc
The dollar found support on dips towards the 0.9750 level on Tuesday and rallied to a high around 0.9850 before losing ground again in choppy trading conditions. There was a small flurry of Euro buying support which moved it slightly away from the 1.2010 area before it retreated again.
There has been an easing of Euro selling in the options market which may indicate that underlying selling pressure has eased slightly, but there are still major fears surrounding peripheral bond markets and the most likely outcome is that the National Bank will have to intervene on a sustained basis.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar initially hit resistance close to 1.03 against the US currency on Tuesday and retreated to test support below 1.0250 following Bernanke’s testimony before finding renewed buying support and rallying back above the 1.03 level.
The currency was boosted by expectations that the Fed would eventually move towards additional quantitative easing and by technical considerations as support levels held. There was also a suspicion of reserve diversification into the Australian dollar. There was still tough resistance close to the 1.03 area even with slightly improved sentiment in regional equity markets.
