by Darrell Jobman, Editor-in-Chief, TradingEducation.com, LLC
Daily currency analysis
for Monday, June 23, 2008
The dollar was little changed close to 1.56 in early Europe on Monday with the US currency hampered by high oil prices following the Jeddah summit where no major policy announcements were made. The dollar was still gaining some background support on defensive grounds while speculative positioning was in favour of the US currency for the first time in 15 months. The Euro then weakened sharply following the European data releases.
The French PMI indices weakened sharply for June with the services and manufacturing indices both below the 50.0 level. The German manufacturing PMI index also fell, but the services index was little changed.
The influential German IFO index weakened to 101.3 in June from 103.5 the previous month which was worse than expected and the lowest for over two years. Continuing the theme, both Euro-zone flash PMI indices were below the 50.0 level for June. The services index was at the lowest level for five years.
Concerns over the Euro-zone economy will increase following the data and there will be pressure for the ECB not to increase interest rates which will unsettle the Euro. Even if the ECB pushes ahead with a tightening, the Euro will struggle to gain strong benefit as economic fears will increase. The dollar recovered firmly to highs beyond the 1.55 level following the data.
There were no significant US data releases on Monday and caution will tend to prevail ahead of Wednesday’s FOMC interest rate decision. The US data will, however, be watched closely on Tuesday and weakness in housing and consumer confidence data would increase pressure for a more moderate Federal Reserve stance. Caution prevented the dollar breaking 1.5460 and it settled close to 1.5520.
The Japanese data remained generally weak on Monday with a deterioration in large-company sentiment, although the impact was limited. Asian currency influences were also mixed as strength in the Chinese yuan was offset by general weakness in other regional currencies.
The dollar was holding close to 107.40 in early Europe with no clear direction as caution persisted before rallying after the poor Euro-zone data. The dollar was unable to hold a brief advance above the 108 level, but retained a firm tone.
The housing weakness was illustrated by a 1.2% decline in the Right-move house-price index for June, reversing the increase seen in May. Overall confidence in the UK economy will remain very fragile, but there will be some support from persistent speculation that the Bank of England will have to consider an interest rate increase.
Anecdotal evidence on housing and consumer spending trends will be watched closely in the short term and suggestions of renewed weakness would unsettle the UK currency, although uncertainty will be a key feature. The UK currency was also unsettled to some extent by slightly more dovish sentiment from MPC member Sentance. He normally takes a tough approach and his comments dampened any speculation that rates could be increased over the next few months.
Sterling weakened to lows below 1.9600 on Monday as the US currency rallied, but recovered ground in US trading. The UK currency was holding steady against the Euro with European currencies as a whole generally on the defensive during the day.
The dollar was around 1.0360 in early Europe on Monday before rallying to 1.0480 after the poor Euro-zone data. The franc was generally on the defensive against the Euro and dipped to lows around 1.6240, which was the weakest franc level for June.
The Swiss currency is struggling to gain any strong support from times of increased risk aversion which suggests underlying franc demand is still weaker. Caution is still required as confidence in the global economy is liable to weaken further which could trigger a sharp switch in investor sentiment.
The Australian dollar retained a firm tone in local trading on Monday, but was still struggling to overcome resistance levels. The currency gained further support on yield grounds with the drop in car sales not having a significant market impact.
The Australian currency is still liable to be unsettled by increased risk aversion, but the impact will be offset while commodity prices remain firm. The Australian dollar dipped back to 0.9520 as the Euro weakened in Europe on Monday and tested levels below 0.95 as copper prices fell sharply before rallying back to 0.9515.