The Euro remained under pressure in early Europe on Monday and dipped to lows near 1.27 against the dollar. Risk appetite remained weaker while the European economic data did little to support confidence.

Any comments from ECB officials will remain extremely important ahead of Thursdays council meeting. Following January's meeting, Chairman Trichet suggested that rates would be left on hold in February with the council waiting for fresh staff projections which will be available in March. Since then, there has been additional pressure for rates to be cut again and any comments over the next 48 hours could provide important hints over the likely policy stance.

The Euro will continue to be unsettled by structural fears as markets debate the possibility of any Euro-zone economy abandoning the Euro. Fears over further credit-rating downgrades will also tend to be damaging for the currency.

The US ISM index for the manufacturing sector was slightly stronger than expected with an increase to 35.6 in January from 32.9 the previous month and this was the first increase since June. There was a recovery in the orders component, but the employment index was unchanged at an extremely weak 29.9. Elsewhere, there was a 1.4% decline in construction spending for December.

Risk appetite improved to some extent during US trading with a degree of relief over the data and this allowed the Euro to recover back above the 1.28 level.

Source: VantagePoint Intermarket Analysis Software

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The clash of domestic and international factors continued on Monday. Severe weakness in the domestic economy was illustrated by a 27.9% annual decline in car sales for January. There were further fears over the industrial sector while Hitachi issued a profit warning and domestic fears continued to unsettle the yen.

Overall risk appetite remained lower as confidence in the global economy continued to ebb. Given these considerations, carry trades remained under pressure which supported by the yen while there was increased speculation over capital repatriation back to Japan.

In this environment, swings in sentiment are liable to continue. The Japanese currency initially secured renewed support against the Euro before losses back to around 115.0 in US trading as Wall Street attempted to rally. The dollar was again blocked close to the 90.0 region.


Sterling was unsettled in Asian trading on Monday as a Moody's downgrade of Barclays debt rating triggered renewed fears over the banking sector. There was also considerable caution ahead of Thursday's Bank of England interest rate decision with expectations of a further cut in rates to a fresh record low of 1.0%.

The UK PMI index for manufacturing rose to 35.8 from 34.9 the previous month which may provide some slight relief, although it still indicates a sharp contraction for the sector. The underlying lack of confidence pushed the UK sharply lower to lows near 1.4050 against the dollar. The UK currency was still unsettled by the underlying debt fears with the borrowing requirement set to expand very rapidly.

Sterling secured some respite later in the day with a rally back towards 1.4260 against the US currency while it consolidated close to 0.90 against the Euro as there was some reluctance to push the currency aggressively lower.

Swiss franc

The dollar pushed to a high around 1.1680 against the franc on Monday, but struggled to hold its best levels with a retreat towards 1.16. The Euro found support close to 1.48 against the franc and strengthened back to 1.49 later in US trading.

The Swiss PMI index weakened to a record low of 35.0 in January from a revised 36.5 the previous month which reinforced fears over the industrial sector.

The franc moves were still correlated strongly with degrees of risk appetite with the Swiss currency gaining support when confidence faltered. Choppy trading conditions are liable to remain a key feature in the short term.


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Australian dollar

House prices and sales continued to decline according to the latest data. Although the direct impact was limited, there were expectations that the Reserve Bank would cut interest rates more aggressively at this week's policy meeting and this hampered the currency.

The Australian currency was also undermined by a general deterioration in risk appetite as global growth fears intensified and retreated to a low around 0.6250 against the US dollar. Confidence will remain very fragile in the short term, but a cautious recovery in risk appetite allowed the Australian dollar to recover back to above the 0.63 level. Volatility will a key threat following Tuesday's interest rate decision.