The Euro edged higher in early Europe on Tuesday, but was again unable to make much headway with resistance below 1.4850 and was subjected to renewed selling pressure during the day.
German consumer prices provisionally rose 0.1% for October which was in line with market expectations and did not have a significant impact on currency rates.
The US durable goods data was broadly in line with expectations with a 1.0% monthly increase and an increase in capital spending provided some limited optimism over the manufacturing sector.
In contrast, the housing data was weaker than expected with new home sales declining to an annual rate of 402,00 from a downwardly-revised 417,000 the previous month. There was a drop in inventories for the month with the number of un-sold homes at the lowest level sine August 1982. Nevertheless, there were further fears over the housing outlook, especially with tax credits for first-time purchases due to expire during November.
Risk appetite deteriorated again following the housing data as Wall Street dipped significantly with particular pressure on the Nasdaq index. In response, the Euro weakened to lows near 1.47 during the US session.
There was some further speculation that the Federal Reserve will tighten its policy rhetoric at next week’s FOMC meeting which provided some dollar support. The Fed will need to tread a very careful path as it will remain very sensitive to a rose in bond yields and currency volatilities are liable to increase.
The trend of a firmer Japanese yen persisted on Wednesday with Asian equity markets weaker with the dollar retreating to 91.20 while the yen also recovered to a 1-week high against the Euro.
The Bank of Japan will announce its interest rate decision on Friday and there is a possibility that they will announce a timescale for removing emergency corporate funding measures, although a further delay is the more likely outcome, especially with pressure from the government. Further evidence of policy tensions between Finance Ministry and central bank would tend to undermine the yen to some extent.
As global equity markets came under further pressure, the yen strengthened to highs near 90.50 against the dollar and also secured a renewed advance to beyond 134 against the Euro.
Sterling again found support below 1.63 against the dollar during Wednesday and secured a significant advance in US trading with a peak above 1.6450. The main catalyst for the move was a sharp Sterling advance against the Euro with some stop-loss Euro selling once there was a break of the 0.90 level.
There were no significant economic data releases during the day and Sterling was surprisingly resilient when global stock markets were subjected to renewed selling pressure. Any renewed stresses within the UK banking sector would tend to undermine the currency.
There will be further uncertainties over monetary policy ahead of next week’s Bank of England policy decision. Sterling is in a better position to gain protection from a lack of confidence in other major economies rather than any great optimism over the UK outlook.
The dollar found support below 1.02 against the franc on Wednesday and strengthened to a high around 1.0270 during New York trading. The Euro drifted back to near 1.51 against the Swiss currency which will inevitably result in fresh speculation that the National Bank will intervene to prevent further franc appreciation.
The bank will certainly be on alert, but it is also likely to be cautious, especially as they will not want to get locked into a pattern of defending specific levels.
The franc will still tend to gain some defensive support when there is a deterioration in risk appetite.
The headline Australian consumer inflation data was marginally higher than expected with a 1.0% increase in prices for the third quarter, but the data was not strong enough to trigger increased expectations of a 0.50% interest rate increase at next week's Reserve Bank meeting and this curbed Australian dollar support as at least a 0.25% increase is already priced in.
Risk appetite was also generally weaker which encouraged profit taking and there was a low near 0.9070 in Asia. The Australian currency was subjected to renewed selling pressure as Wall Street weakened and there was a slide to lows below 0.8970 during New York as the break of 0.90 triggered stop-loss selling.