The Euro edged weaker in early Europe on Tuesday with confidence undermined initially by weaker than expected German retail sales data with a reported 0.2% December decline. The Euro found support close to this level and strengthened steadily back towards 1.29 ahead of the US open.

ECB sources suggested that the data may justify a rate cut in March, but that the amount is not yet known while there were no current plans for quantitative easing. The remarks suggest that the bank would still prefer not to cut rates this week which will provide some degree of Euro support.

US pending home sales rose by 6.3% in December following a revised 3.8% decline the previous month and this had some positive impact on market confidence. There was also some optimism that a further round of government-backed policy action would help stabilise conditions in the global economy. As risk appetite improved slightly, there was reduced defensive dollar demand.

The Federal Reserve announced that the emergency swap facilities would be extended for a further six months which illustrates that market conditions are still far from normal while Libor rates were little changed over the day.

The decline in dollar demand still pushed the Euro significantly higher following the US data, especially as US stocks also rallied, and the Euro peaked near the 1.3050 level.

Source: VantagePoint Intermarket Analysis Software

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The Bank of Japan announced on Tuesday that it would buy bank shares in a package worth US$11bn. The move underpinned risk appetite to some extent and weakened the yen, although the impact was still measured as underlying confidence remained extremely fragile. Bank of Japan Governor Shirakawa voiced concerns over any plans to print money to support the economy, especially as it would risk undermining confidence in the currency.

The dollar was again unable to push above resistance in the 90 region against the yen as there was still a reluctance to push funds overseas due to global economic fears.

The Japanese currency lost ground against the Euro and Australian dollar in US trading on Tuesday, but the dollar struggled to benefit and was again trapped below the 90 level.


Sterling initially edged lower on Tuesday as the substantial Australian interest rate cut reinforced expectations of a further Bank of England reduction this week with lows near 1.4150 against the dollar.

The construction PMI index was also slightly stronger than expected with a rise to 34.5 in January from 29.3 which offer some slight relief as it was the strongest reading for seven months, although it still suggested sharp contraction in the sector.

The services-sector data will be watched very closely on Wednesday, especially as the survey is watched very closely by the Bank of England. Any improvement in the index would increase market speculation over a rate pause. Markets will still consider a further cut the most likely outcome, but there are likely to be some reservations over aggressive Sterling selling. The Building Society Association also called for interest rates to be left on hold.
As stock markets rallied, the UK currency pushed to a high above 1.4450 against the US currency with choppy trading likely to be a key feature.

Swiss franc

The dollar was unable to break above the 1.1680 region against the franc on Tuesday and weakened sharply to lows near 1.14 in US trading. The Swiss currency was broadly resilient against the Euro during the day and consolidated around 1.49.

The Swiss trade surplus fell sharply for December with a 13% annual decline in exports which illustrated the substantial difficulties in the trade sector and will reinforce negative sentiment towards the economy. The National Bank will also take close notice of the data and will remain uneasy over the implications of any further franc gains.

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Australian dollar

The Australian Reserve Bank cut interest rates aggressively by 1.00% to 3.25% which was in line with market expectations while the bank was slightly more cautious than expected over the prospects or a further cut in rates. The government also announced a further AUD42bn fiscal stimulus package which had a significant impact in boosting sentiment.

With regional markets stabilising, the Australian dollar bounced back towards the 0.64 region in Europe. Confidence will remain very fragile, but hopes for a concerted global response, allied with gains on Wall Street, pushed the Australian currency to a high above 0.65 against the dollar in US trading.