The recent US data should help reinforce near-term optimism surrounding the economy, especially if there are equity-related inflows. The underlying situation is still brittle and fears over the US budget situation will also remain a negative influence for the dollar. Overall sentiment surrounding the Euro-zone economy and currency will remain weak and act as a major barrier to an extended Euro recovery. Overall, Euro gains are liable to be capped near 1.40 and renewed losses to at least 1.3850 are realistic following Thursday's ECB meeting.
The Euro was able to resist a further test of support below the 1.39 level on Tuesday and consolidated with a slightly firmer bias following the sharp losses seen over the previous few sessions. There was pressure for a correction after the losses and there were also some reports of institutional Euro buying at lower levels which also helped improved the Euro's tone.
The US data was slightly stronger than expected with pending home sales securing a small monthly recovery following sharp losses the previous month. The data helped maintain the slightly more optimistic tone surrounding the US economy, but also helped underpin risk appetite. The Euro tends to gain some support in these circumstances as defensive dollar support eases, but there will also be some potential net equity flows into US capital markets which will tend to underpin the dollar.
US Treasury Secretary Geithner repeated his support for a strong dollar policy, but this failed to have a significant impact.
Overall sentiment surrounding the Euro-zone remains weak with lacklustre economic data and persistent structural vulnerabilities. There will be further concerns surrounding the Greek budget situation which will continue to limit Euro support selling pressure could return quickly.
The Euro edged higher to the 1.3970 region, but was not able to make a challenge on the 1.40 area during the day.