The Euro pushed to re-challenge resistance levels above the 1.33 level in Europe on Wednesday, but again failed to sustain the advance with a retreat back towards the 1.32 region ahead of the FOMC interest rate decision.

There were expectations that the Administration would expand the fiscal stimulus package while there were also expectations that a new bank would be formed to help draw bad debts out of the banking sector. These expectations underpinned risk appetite and also provided some indirect support to the Euro.

Provisionally, German consumer prices fell 0.5% in January to give an annual inflation rate of 0.9%. The further inflation decline will maintain expectations that the ECB will have scope to lower interest rates further. ECB officials continued to take a relatively cautious stance with Weber stating that Germany did not face deflation

The Federal Reserve left interest rates unchanged at the latest FOMC meeting with a 0.0 - 0.25% range for the Fed funds rate. The Fed also stated that it was prepared to purchase longer-term Treasury Securities if circumstances suggested that this would be beneficial.

There were still some signs of stresses within the markets as dollar Libor rates edged higher over the day. The importance of long-term interest rates was illustrated by the sharp drop in weekly mortgage approvals as interest rates moved higher. There will, therefore, be strong pressure on the Fed to push long-term rates lower through aggressive buying of securities and this would tend to undermine the dollar.

Following the Fed decision, the dollar strengthened to highs near the 1.31 level with the Euro undermined in part by its inability to push stronger.

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Sentiment has continued to fluctuate in line with major uncertainty over economic direction. Continuing fears over the short-term outlook is being countered by hopes that global policy action will help trigger a rebound. Asian markets were generally firmer on Wednesday with hopes for greater action to support the US economy and this lessened near-term demand for the Japanese currency.

The dollar edged back above 89 against the yen with the Japanese currency also slightly weaker on the crosses.

The dollar pushed higher following the FOMC decision with a peak around 90.70 before drifting back towards 90.20 while the Euro was unable to push above 120 against the Japanese currency. Overall risk appetite may remain slightly stronger in the short term.


Sterling maintained a firmer tone on Wednesday with the trade-weighted index rising to a one-week high. The UK currency pushed to highs above 1.43 against the dollar and made some headway against the Euro with a peak close to 0.92.

There were reported comments from George Soros that selling Sterling offered little value below the 1.40 level against the dollar and this helped trigger a further covering of short Sterling positions. The UK currency also gained some support from a rally in European bourses during the day.

The underlying economic fears were still important and the IMF warned that the UK economy was liable to contract around 3.0% in 2009. Fears that the UK will under-perform the global economy will continue to be a negative factor for Sterling and it retreated to below 1.42 following the FOMC decision.

Swiss franc

The franc weakened significantly against the Euro during the day with lows towards the 1.52 level before a recovery. It also struggled to make any headway against the dollar and retreated to 1.1550 following the Fed interest rate decision.

The KOF business confidence index weakened further to a record low of -0.87 in January from a revised -0.45 the previous month which will maintain a lack of confidence in the Swiss economy. There will be particular fears over the further significant deterioration at a time when the German indicators have shown some signs of stability.

The National Bank also set up a swap facility with Hungary which undermined the franc to some extent while the wider improvement in risk appetite also curbed currency demand.


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Australian dollar

The Australian dollar managed to maintain a firmer tone during the past 24 hours. Domestically, consumer prices fell 0.3% in the fourth quarter following a 1.2% increase previously. The data was slightly stronger than expected and failed to have a substantial impact as markets have already priced in further interest rate cuts by the Reserve Bank.

The rally in commodity prices and tentative improvement in risk appetite allowed the Australian currency to re-approach the 0.67 level on Wednesday, but it retreated back towards 0.66 as the US currency rallied following the FOMC decision.