USD - The U.S. dollar strengthened against the euro and weakened against the yen amid heightened risk aversion following the outcome of Italian elections and after the release of consumer confidence figures in the U.S. Consumer confidence came in at 69.6, above forecasts of 61.0. Investors' are turning their attention to focus on U.S. Federal Reserve Chairman Ben Bernanke's congressional testimony which gets underway today. The market will be looking for hints on further policy moves. Some Fed officials have questioned how long the Fed should keep buying Treasury bonds to support the economy. The Fed chief is expected to strike a dovish tone. If Bernanke is in favor of maintaining looser monetary policy, the dollar could weaken across the board.
EUR – The euro is lower over fears of a political stalemate in Italy. The recent Italian elections resulted in a fragmented parliament which could stall any further reform economically. With no party securing a clear majority, the results suggest a possible further six months of uncertainty and even perhaps another election. The market hopes have been tilted towards the centre-left bloc led by Pier Luigi Bersani.
The most unfavorable outcome for the euro zone would be a Berlusconi win. But the strong performance by the Berlusconi camp, coupled with the even stronger outcome for another third party candidate, Beppe Grillo is already causing concern over the anti-austerity measures. A Bersani government on the other hand, would align itself closely with the French government with Paris pushing for growth and employment policies in the euro zone.
With another six months of instability in Italy on the table, the euro is likely to remain under pressure and re-test its 100-day moving average of $1.3123. The market will also look towards tomorrows offering of 6.5 billion euros of 5-year and 10-year Italian bonds to test investors risk appetite.
GBP – Sterling fell against the dollar after Bank of England policymaker Paul Tucker stated that the real exchange rate needs to fall. Tucker also testified in front of a Parliamentary committee warning of the potential for negative interest rates. Moody's downgraded the UK last week, knocking the country off its triple-A credit rating down to Aa1. Moody’s stated that the downgrade came on the “continuing weakness” of the U.K. economic outlook. The credit ratings agency went on to say that while the U.K. retains “considerable structural economic strengths,” Moody’s also said its higher debt burden reduces its “shock-absorption capacity.” With the pound falling 6.7 percent against the dollar so far this year coupled with the downgrade, look for the pound to remain under pressure.
JPY – The Japanese yen strengthened against the dollar as the currency saw a technical correction towards the mid-91 level. The move came after President Obama and Prime Minister Abe met last Friday. The primary outcome of the meeting was further clarification over security and economic issues. Obama stated that the two agreed that the "number one priority" must be "increasing growth" and making sure people of both countries can prosper. The market will look towards tomorrow’s releases of the JMMA Manufacturing Purchasing Index and industrial production figures for further direction into the USD/JPY currency pair.
Commodities – The Canadian dollar touched its weakest level in 8 months against the U.S. dollar, led by lower oil prices slipping to a one-month low due to the uncertain outcome in Italy’s elections. The price of crude oil touched a low of $91.92 earlier, a level not seen since Jan. 4 as an inconclusive Italian election raised investor concerns. The Australian dollar faced downside pressure against the U.S. dollar after RBA Assistant Governor Guy Debelle spooked the markets stating that relative AUD strength has a serious impact on the economy and noted there is scope to lower rates further if needed. The forceful tone on the bank's ability to intervene if warranted and the uncertainty in the global economy has pressured the Aussie.
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