The Euro was unable to push above the 1.2950 region on Friday, but resisted a renewed decline below 1.28 as trading ranges were slightly narrower. The Russian rouble maintained a firmer tone which provided some Euro support over the day.

There was a 2.1% fourth-quarter GDP decline in Germany, the sharpest decline for over 20 years, while Euro-zone GDP fell 1.5% which was a record quarterly decline. The data will reinforce fears over the Euro-zone economy and there will be pressure for additional policy action. There will be further very strong expectations that the ECB will sanction a further significant interest rate cut in March.

The University of Michigan consumer confidence index weakened further in the provisional February reading with a decline to 56.2 from 61.2 the previous month and this put the index back to near the 28-year low seen in November. The current conditions component was marginally higher, but the expectations component weakened further. In this environment, confidence in the US economy will remain very fragile.

The comments from G7 officials surrounding the US and European economies will be watched closely. Evidence of serious tensions over policy issues would tend to reinforce the deterioration in risk appetite which would also tend to undermine the Euro early next week. In contrast, a generally constructive tone would tend to provide some degree of support for the Euro.

Source: VantagePoint Intermarket Analysis Software

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The yen retained a weaker tone in Asia on Friday with some optimism over official action to support the US and global economy. Regional equity markets rallied after three days of losses and this curbed yen demand. The Bank of Japan also pledged that credit-market support measures would be extended for a further six months which lessened yen demand.
The G7 meetings will be watched closely and a unified tone on the need for further measures to support the global economy would tend to underpin risk appetite which would also lessen yen demand. 

In contrast, tensions over Asian exchange rate policies would tend to push the yen stronger early next week. With position adjustment a feature on Friday, the yen retreated to near 92 in New York as risk appetite improved while sentiment towards the Japanese economy continued to deteriorate.


Sterling found support below the 1.43 level against the dollar in early Europe on Friday and then pushed sharply stronger with a peak near 1.46. There was some speculation that G7 members would discuss Sterling weakness at the weekend meetings and this triggered some covering of short positions.

The UK currency was undermined in US trading following a trading update from Lloyds Bank. It announced that the recently-acquired HBOS group would post losses of at least GBP10bn for 2008.

This triggered a very sharp decline in the share price of Lloyds and also triggered selling pressure on Sterling given that the UK currency performance is still correlated strongly with trends in the financial sector.
If G7 does not mention Sterling significantly at the meetings, then there may be some renewed selling pressure on the currency next week. The UK currency should still gain some protection from an improvement in risk appetite and consolidated stronger than 0.90 against the Euro.

Swiss franc

The dollar was confined to relatively narrow ranges during Friday with a fluctuation around the 1.16 region.

There was a tentative improvement in risk appetite during the day and this lessened demand for the Swiss currency.

Swiss producer prices fell 0.8% in January with an annual decline of 0.9% compared with expectations of a 0.2% year-on-year fall. The weak data will maintain expectations of a sustained period of very low interest rates, especially with a low consumer inflation report earlier in the week, and this will tend to sap franc support.

Source: VantagePoint Intermarket Analysis Software

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Australian dollar

The Australian currency retained a firmer tone in local trading on Friday with a move back above 0.66 against the US dollar. The currency was boosted by parliamentary approval of the budget stimulus which boosted optimism that there would be a recovery in the economy. Wider risk appetite also improved slightly and there was some optimism over the Chinese economy as bank lending strengthened.

Conditions were relatively tentative during the day, and, although the Australian currency maintained a firmer tone it struggled to hold above 0.66 in New York.