Daily currency analysis
The dollar was confined to narrower ranges on Tuesday with the US currency unable to break resistance levels below 1.4680. There was support close to 1.4740 with a lack of major fresh incentives to help guide the market.
US pending home sales fell 2.6% for November, but the October data was revised up to show an increase of 3.7% which will minimise the impact of the weaker headline data.
There will still be strong expectations of further interest rate cuts by the Federal Reserve. In this context, comments from Fed officials will remain under close scrutiny in the short term. In remarks on Tuesday, Governor Plosser stated that he was more concerned over the inflation outlook while the economy should revive over the second half of 2008. This is significant as further interest rate cuts now would not have any significant impact until after mid year.
Plosser's comments will cast doubts on an aggressive Fed policy on rates later this month, although he is a notable hawk on inflation and monetary policy and there are a wide range of views within the Fed. The net impact should be to offer some slight dollar support.
There was a further 0.5% decline in Euro-zone retail sales for November to give a 1.4% annual decline and this will reinforce expectations of an economic slowdown, although the German industrial orders data was robust. There will be caution ahead of Thursday's ECB policy decision and statement.
The yen edged weaker towards 109.50 against the dollar in Asian trading on Tuesday as stock markets attempted to rally. There was also further pressure for a technical dollar correction stronger after heavy selling pressure seen over the previous week.
There are still no market expectations that the Bank of Japan will increase interest rates from 0.50% in the first half of 2008. In this environment, the Japanese currency will tend to weaken if there is any significant easing of risk aversion, especially with persistent retail yen selling.
General unease over global growth trends should still provide some important yen protection in the short term as US recession fears persist. The yen strengthened back to 109.0 in New York with the dollar unsettled by persistent rumours of difficulties at Countrywide Financial and a sharp downturn on Wall Street.
Sterling held its ground in Asian trading on Tuesday despite a weaker than expected retail sales report. The British Retail Consortium (BRC) reported that like-for-like sales were at a three-year low of 0.3% for December which will reinforce fears over a slowdown in consumer spending.
Sterling received a boost after the Halifax Bank reported that house prices rose 1.3% in December. Sterling pushed to highs around 1.9820 against the dollar before drifting back to 1.9725 in US trade as buying support faded.
There will still be strong market expectations of an interest rate cut in the first quarter of 2008 and a series of cuts for the year as a whole. The decision on Thursday is liable to be very close with serious bank concerns over growth trends offset by persistent unease over inflation.
Any Sterling respites on solid data or a decision to hold interest rates this month may prove short-lived as the overall fundamentals are liable to deteriorate.
The US dollar was blocked close to 1.12 against the Swiss franc on Tuesday and drifted back towards 1.1130 in subdued trading. The Euro also hit selling pressure close to 1.6450 against the Euro.
Levels of risk tolerances remained a key factor for the Swiss currency and the franc weakened slightly as global stock markets rallied in Europe. There was still a high degree of caution over the situation and the franc regained some ground in New York as US stock prices came under fresh selling pressure.
The Australian dollar found support close to 0.87 against the dollar on Monday and pushed stronger to 0.8780 in local trading on Tuesday. Domestically, there was a strong reading for building approvals which supported sentiment, although the gains were concentrated in the volatile multi-dwelling sector which will limit the impact.
There was a slight easing of risk aversion which initially helped support the currency. Especially with firmer commodity prices. Underlying growth fears are liable to continue which will prevent more substantial short-term buying support and there was a retreat to 0.8800 in New York from highs of 0.8830.