The Euro remained volatile during the day as markets struggled to find a decisive theme. The Euro tested support towards the 1.2550 level, but resisted a decline through this level and steadied around the 1.26 area ahead of the US open.

The Euro-zone PMI data remained weak with the manufacturing PMI index weakening to 33.6 from 34.4 the previous month and this was a fresh record low for the index while the services-sector index also deteriorated.

The Euro gained some support from a media report that the German government was preparing a support package for the regional banks. Gold prices continued to rally to around the US$1000 per ounce level which provided Euro support.

The global financial sector remained an important focus with further rumours that the US Administration would be forced to nationalise key banks such as Citigroup, possibly as early as this weekend. These stresses initially provided some dollar support, but sentiment turned in New York. Any move to take control of the banks would tend to be a negative factor for the dollar as it would ease uncertainty and also trigger further alarm over the US deficit financing position. No action would maintain the mood of major uncertainty.

The US consumer inflation data was slightly stronger than expected with a 0.3% increase in January after a 0.8% decline the previous month with year-on-year inflation at zero. There was a 0.2% increase in core prices for a 1.7% annual increase. The data should have some impact in easing immediate fears over the deflation threat.

The Euro jumped higher to a peak around 1.2840 around the European close on position adjustment even though Wall Street remained under pressure.

Source: VantagePoint Intermarket Analysis Software

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The Japanese economic data remained weak with a 2.7% decline in the all-industries index for December. In its latest monthly report, the Bank of Japan maintained a downbeat tone with a warning that corporate profits were deteriorating at a faster pace. The lack of confidence was illustrated by further downward pressure on the Nikkei index and the wider Topix index weakened to the lowest level for close to 25 years.

Overall confidence in the yen is liable to remain weaker in the short term and it is finding it more difficult to gain support even when risk appetite deteriorates. There was still evidence of increased exporter selling above 94 and this capped the dollar below the 94.50 region in early Europe on Friday with markets continuing to test technical levels.

The dollar was again blocked near the 94.50 level with rally attempts undermined by stresses within the financial sector and Wall Street weakness with the dollar weakening back to 93.20.


Sterling found support below the 1.42 level against the dollar and maintained a firmer tone after an initial rally following the economic data. Sterling hit tough resistance close to 0.88 against the Euro.

The headline retail sales data was stronger than expected with a 0.7% monthly increase in volumes after a revised 1.7% increase the previous month. The data will trigger some hopes that sales are holding firm, although there will have been a strong impact from price discounting.

There will be some speculation that the Bank of England may have been over-pessimistic in its economic assessment. Nevertheless, the net risks suggest that the economy will continue to contract sharply which will tend to limit Sterling support, especially if stresses within the banking sector increase.

Swiss franc

The Swiss currency was subjected to high volatility on Friday. The franc weakened to 2009 lows near 1.19 against the dollar, but rallied very strongly in late European trading with a peak near 1.1520 before consolidation around 1.16.

There will have been a strong suspicion that position adjustment ahead of the weekend helped trigger the sharp move as liquidity deteriorated.

A lack of conviction over the implications for Eastern European stresses will maintain the risk of erratic trading.

Source: VantagePoint Intermarket Analysis Software
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Australian dollar

Reserve Bank Governor Stevens warned over the economic environment, although there was caution over the need for aggressive interest rate cuts. The Australian currency initially rallied following the speech, but deteriorating risk appetite pushed the Australian currency back to below 0.64 in Asia as equity prices remained under pressure.

The Australian currency resisted further selling pressure over the day, but was blocked near the 0.65 level against the US dollar as weaker equity markets remained a negative influence on risk appetite and the Australian currency.