The Euro was unable to hold above the 1.30 level on Wednesday and weakened steadily during the day. The Euro was undermined in part by a downgrading of Russia's sovereign credit rating which increased speculation that there would be further selling pressure on the Russian currency which tends to undermine the Euro. There were also a wider increase in fears over Eastern Europe which had a negative impact.

The European data did not have a major impact with a small downward revision to the PMI services-sector index while retail sales volumes were unchanged in December to give a 1.6% annual decline.

The ECB interest rate decision will be watched closely and a reduction in the main financing rate would tend to weaken the Euro given expectations that rates will be left on hold. The press conference will be watched very closely following the decision, with the ECB is likely to warn over growth conditions and signal again that the March decision will be very important.

There was significant US labour-market data over the day with the latest ADP employment report recording a further 522,000 decline in employment for January following a revised 659,000 drop the previous month. The Challenger group data also reported that layoffs were at a 7-year high.

Elsewhere, the PMI index for the services sector recovered slightly to 42.9 from 40.1, although the employment component weakened slightly further. Markets will be expecting a further very substantial payroll decline on Friday, but there will be some hopes that the rate of deterioration is slowing. The Euro bounced from lows near 1.28, but was unable to make any significant headway with choppy trading set to continue.

Source: VantagePoint Intermarket Analysis Software

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The Japanese economic data remained mixed with the relatively new services-sector index declining to 34.1 in January from 37 the previous month. The current state of uncertainty was illustrated by the markets focus on more forward-looking indicators A rise in the Chinese PMI indices for January, allied with further government support measures, underpinned confidence and the Nikkei index recovered ground.

In this environment, the yen retained a weaker tone on the crosses, especially against the Euro, although selling was contained. The dollar was unable to make any headway and was trapped below the 90 level.

There are liable to be further swings in sentiment over the next few days given the lack of confidence in trends. The dollar edged stronger in US trading on hopes that the US economic deterioration was slowing with Wall Street losses limiting support.


Sterling retained a firmer tone on Wednesday with highs above the 1.45 level against the dollar before encountering profit taking while the UK currency also strengthened beyond 0.89 against the Euro.

The UK PMI index for the services sector rose to 42.5 in January from 40.2 the previous month which will trigger some further speculation that the economy is starting to stabilise and that Bank of England could decide to be less aggressive in cutting interest rates.

Markets are still expecting that interest rates will be cut, but there will be less confidence over the outcome. There will also be increased speculation that the bank will effectively signal a substantial pause in the rate-cutting process and this could provide initial Sterling support. The principal feature is liable to be high volatility.

Swiss franc

The franc was unable to strengthen through the 1.14 level against the US currency on Wednesday and weakened back to 1.16 in US trading. The Swiss currency fluctuated around the 1.49 level against the Euro with no clear direction.

The franc lost some support on hopes that the global economy could be stabilising, but losses were limited as equity markets reversed initial gains.

The tensions within Eastern European economies should provide some degree of protection to the Swiss franc.

Source: VantagePoint Intermarket Analysis Software

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Australian dollar

The domestic data on Wednesday recorded a further downturn in building approvals. In contrast, the retail sales data was much stronger than expected with a 3.8% monthly increase with some support from the fiscal stimulus, although the data is erratic.

The Australian currency was unable to strengthen to above the 0.66 level against the US dollar and weakened sharply in early Europe as there was heavy selling against the yen. The Australian dollar moves will tend to remain correlated strongly with degrees of risk appetite with volatility likely to remain a key feature. The Australian dollar found support close to the 0.6350 region, but was unable to regain 0.65 as Wall Street weakened.