The Euro was on the defensive ahead of the US GDP data on Friday as underlying risk appetite remained fragile.

The Euro-zone data recorded a further increase in unemployment to 8.2% for January from a revised 8.1%. Although the provisional February German inflation was higher than expected with a 0.6% monthly increase in prices, the ECB is set to cut interest rates at the March meeting.

The US data releases maintained the weak tone seen over the past week. The main focus was on the GDP data with contraction for the fourth quarter revised up to an annualised rate of 6.2% from the provisional 3.8%. Inventories were revised down and consumer spending was also estimated to have fallen more substantially.

Risk appetite deteriorated after the data, but the impact was relatively short-lived. The Chicago PMI index edged slightly higher to 34.2 in February from 33.3 the previous month. The orders component was little changed while the employment index weakened further. The revised University of Michigan confidence index was little changed at 56.3 for February and confidence in the economy will remain weak.

The Administration formally announced the support package for Citigroup with the authorities taking a bigger stake in the bank. There was an unfavourable reaction from the markets which triggered a fresh increase in risk aversion and this also provided some dollar support against European currencies. The Euro tested levels close to 1.26 with the dollar trade-weighted index close to a three-year high, but the Euro recovered back to 1.27.

Source: VantagePoint Intermarket Analysis Software

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The Japanese economic data remained grim with industrial production falling by a record 10% for January following a 9.8% decline the previous month as industry remained under severe pressure. Core consumer prices were unchanged over the year while household spending fell 5.9% over the year.

Although extremely weak, the data was no worse than expected and the yen avoided further selling pressure following the data. There was also evidence of month-end dollar selling which helped trigger a partial yen correction and the Japanese currency was still over-sold technically after recent heavy losses.
Underlying confidence is still liable to be weak in the short term with the yen still finding it much more difficult to secure any defensive support.
The yen gained ground as equity markets came under renewed selling pressure, but it was unable to sustain the gains and the dollar rallied back to 97.70 later in New York.


Sterling was generally weak in European trading on Friday with a further test of support below 1.42 against the dollar.

It was again unsettled to some extent by stresses within the banking sector as the share price of Lloyds Group fell sharply following annual results. The UK currency was also unsettled by a wider increase in risk aversion.

The economic data will be watched closely next week with a particular focus on the PMI data while the Bank of England will also announce its latest interest rate decision with markets expecting rates to be cut again.

Sterling weakened to lows near 1.41 against the dollar following the US data, but then rallied back to test resistance near 1.4350 and also strengthened to near 0.8850 against the Euro.

Swiss franc

The dollar pushed higher on Friday and tested levels above 1.1750 against the franc, but was unable to sustain the gains. The Swiss currency was generally trapped close to 1.4850 against the Euro before some gains later in US trading.

The Swiss KOF index was substantially weaker than expected with a decline to a record low of -1.41 in February from -0.93 the previous month. The sharp decline will increase fears over the Swiss economy with particular fears surrounding exports as the European economy remains under pressure.

The Swiss weakness will severely limit the potential for Swiss franc support even if risk appetite deteriorates further.

Source: VantagePoint Intermarket Analysis Software
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Australian dollar

The domestic data provided some degree of support for the Australian currency with a rise in private-sector credit for the latest month. There will still be caution ahead of the Reserve Bank of Australia interest rate decision next week.

The currency will still be influenced strongly by degrees of global risk appetite and fears over the Asian economy will be a negative influence on the currency. As equity markets declined, the Australian dollar weakened to lows near 0.6340 against the US dollar before rallying back to 0.6400 as Wall Street gained ground. Choppy trading is liable to remain a key short-term feature.