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Euro Was Subjected to Heavy Selling Pressure
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Aug 03, 2012

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Darell Jobman

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EUR/USD

The Euro found support in the 1.2250 area against the dollar ahead of the ECB interest rate decision on Thursday and pushed higher. Interest rates were left on hold at 0.75% following the latest council meeting and the Euro pushed to challenge resistance levels above 1.23 with a further spike higher ahead of the press conference as markets anticipated aggressive market action to underpin the Euro-zone.

In the press conference following the decision, President Draghi stated that the bank may move to start open-market operations. Draghi did not state whether any intervention would be sterilised or unsterilized. He stated that action could be taken within the next few weeks. There was, however, a clear intent over conditionality and insistence that governments would need to seek aid from the EFSF before there could be action.

There was initial market disappointment over Draghi's comments who had hoped for more decisive action. Spanish and Italian bond yields rose sharply and the Euro was subjected to heavy selling pressure. There were clear signs that the Bundesbank had not agreed to radical proposals and that further negotiations would need to take place. There will also be an important focus on Spain and Italy as they will need to apply for a bailout before the ECB steps in to the market. Spain will effectively have to accept a sovereign bailout and prolonged austerity for ECB action to take effect.

The economic assessment was generally downbeat with further warnings over the downside to activity. Draghi stated that an interest rate cut had been discussed, but this was not the time for action. There will be expectations of a rate cut at the September meeting.

The US jobless claims data was slightly better than expected with an increase to 365,000 in the latest week from 358,000 previously. There was caution ahead of the pivotal US payroll data on Friday and a weak figure would intensify speculation over Federal Reserve quantitative easing in September. Indeed, there will be speculation over co-ordinated action in September. The Euro weakened very sharply to lows below 1.2150 before recovering back towards 1.22.

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Yen

The dollar retreated to the 78.20 area against the yen on Thursday and moves were extremely narrow over the remainder of the day as Euro moves dominated market action.

The latest US payroll data will be watched closely on Friday and the dollar will gain some degree of support if there is a better than expected release.

There will still be the potential for underlying yen buying support on defensive grounds, especially with speculation that the Federal Reserve and ECB will take action to expand monetary policy over the next few weeks. There will be expectations that the Bank of Japan will be forced to intervene aggressively to prevent renewed yen gains as the dollar consolidated just above 78.0.

Sterling

Sterling initially found support in the 1.5550 area against the dollar on Thursday and moved higher following the Bank of England decision. There were no changes in interest rates or quantitative easing at the latest meeting which was in line with market expectations. There were expectations that the bank would take further action within the next few months given the economic weakness.

There was some relief in the latest economic data with the CIPS construction data moving back to above the 50 level for July and the PMI services data will be watched closely on Thursday.

Market activity was then dominated by the ECB rate decision and press conference and from a peak around 1.5670, Sterling fell sharply to lows below 1.55 before a limited correction. The NIESR downgraded its assessment of the UK economy as it forecasted a 0.5% contraction for 2012. Any reduction in safe-haven demand would risk heavy Sterling selling.

Swiss franc

The dollar found support in the 0.97 area against the franc on Thursday and rallied strongly to a peak close to 0.99 before a limited corrective retreat. The Euro pushed to a high just above the 1.2025 level before moving back to the 1.2010 area.

Expectations that the ECB will move towards quantitative easing could trigger renewed capital flows into the Swiss currency and maintain pressure on the 1.20 minimum level. The Swiss PMI index edged higher to 48.6 for July from 48.1 the previous month which will provide only limited relief.

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Source: VantagePoint Intermarket Analysis Software

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Australian dollar

The Australian dollar pushed sharply higher ahead of the ECB press conference on Thursday with a peak just above 1.0570 before retreating sharply to lows below 1,0450 as there was a rapid slide in the Euro against the US currency. There was a deterioration in risk appetite as equity markets declined which undermined the Australian currency.

The currency still proved to be broadly resilient with expectations that global central banks would take action to underpin the global economy. There were also some expectations of underlying reserve diversification into the Australian currency.

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