The Euro probed support and resistance levels during Wednesday, but was unable to secure a decisive trend as uncertainty remained the dominant influence. Risk appetite was still fragile following the negative Wall Street reaction to the Treasury's Financial Stability Plan and this tended to keep the Euro on the defensive, especially with persistent fears over the European banking sector.

There were no significant Euro-zone data releases, but there were several comments from ECB officials. The tone from all was that there was scope to cut interest rates in March and the bank is continuing to give very strong policy signals. There was, however, further opposition to a policy of pushing rates towards zero.

The US trade deficit fell for the fifth successive month to US$39.9bn from a revised US$41.6bn the previous month and was at a six-year low. There was a further sharp monthly decline in imports and exports, reinforcing fears over a deep downturn. Although the underlying deficit improvement will offer some dollar support, recession fears are liable to remain dominant in the short term.

In this context, the jobless claims and retail sales data will be very important on Thursday. A further slump in sales would reinforce fears over a deep recession and would again, paradoxically, trigger some defensive dollar support while improved data would boost risk appetite.

With the Euro unable to break above 1.30 following the US data, it weakened to lows around 1.2830 before recovering back to 1.2900 in indecisive trading.

Source: VantagePoint Intermarket Analysis Software

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Japanese markets were closed for a holiday on Wednesday which dampened activity to some extent. Asian equity markets were generally on the defensive with confidence still unsettled by reaction to the US Financial Stability Plan. China's exports weakened 17% in the year to January which also undermined risk appetite, although the data was distorted by the New Year holiday timing.

With confidence remaining fragile, the dollar tested support levels below the 90 level against the yen. Wall Street attempted to rally following the US data and this curbed yen demand with the US dollar recovering back to near 90.50 later in New York.


Sterling remained on the defensive in early Europe on Wednesday with losses towards 0.90 against the Euro and to near 1.44 against the dollar as sentiment towards the financial sector remained fragile.

The UK claimant count rose by 73,800 in January after a revised 79,900 increase the previous month which will provide some slight degree of Sterling relief given fears over an even higher increase. Nevertheless, the unemployment rate was still at a 9-year high.
In its quarterly inflation report, the Bank of England stated that inflation was likely to fall substantially below the 2.0% target in the medium term, potentially with a level of around 0.50% in two years time. Bank Governor King also warned that the UK was experiencing a deep recession.

The report stated that there was little scope for further stimulus through interest rate cuts and the focus will, therefore, tend to be on the possibility of quantitative easing. King stated that this would remain under discussion and that there could be a decision to implement such a policy at the March MPC meeting.

The downbeat comments from the bank, allied with increased speculation over the quantitative easing, will be a negative factor for Sterling. After a brief respite following the employment data, Sterling weakened to lows near 1.43 against the dollar before a slight recovery.

Swiss franc

The dollar found support close to 1.15 against the franc during Wednesday, but was unable to make headway much above 1.1620 while the franc edged slightly weaker against the Euro, but resisted a decline through 1.50.

Risk conditions were marginally firmer later in the day as Wall Street rallied which curbed demand for the franc.

The latest Swiss consumer confidence data will be released on Thursday and a depressed reading would increase pressure for further National Bank action to support the economy which would also tend to weaken the franc.

Source: VantagePoint Intermarket Analysis Software

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Australian dollar

As risk appetite deteriorated, the Australian currency weakened to lows near the 0.65 region against the US dollar in Asia on Wednesday. The domestic data was mixed with a sharper than expected decline in consumer confidence in the latest survey offset by a firmer housing data. Building approvals rose 6.4% over the month after a revised 1.8% gain previously.

Gold prices strengthened sharply over the day and this provided some Australian currency support, but it was unable to regain the 0.66 level in subdued conditions.