Expectations Surrounding Potential ECB Bond BuyingFriday, September 14th, 2012
The Euro found support below 1.25 against the dollar on Tuesday and pushed higher during the European session. There was a stronger than expected reading for Euro-zone money supply and private lending which boosted optimism that there could eventually be an improvement in growth conditions.
There were also further expectations surrounding potential ECB bond buying which had a significant market impact and were generally seen as constructive for the Euro while there was a decline in Spanish yields at the latest bill auction which improved underlying sentiment, although the impact was offset by data showing a sharp decline in Spanish bank deposits during July.
ECB sources stated that President Draghi would not be attending the Jackson Hole meetings at the end of the week with reports that the workload was too heavy. The announcement fuelled market expectations that the ECB would be in a position to announce significant policy measures at the September policy meeting which provided underlying Euro support.
The dollar was undermined by a report from ratings agency Fitch which stated that the US AAA rating could be under threat during the first half of 2013 due to the underlying US fiscal vulnerability.
There was a positive reading for the Case-Shiller house-price index for the first time since 2007 which had some positive impact on sentiment. In contrast, there was a weaker than expected reading for consumer confidence with a decline to a nine-month low of 60.6 for August from a revised 65.4 the previous month.
The data will maintain expectations that the Federal Reserve could move towards additional policy easing with markets still eagerly awaiting Chairman Bernanke’s speech on Friday. The Euro pushed to a 7-week high near 1.2580 before consolidating as narrow ranges prevailed.
The dollar found support below the 78.50 level against the yen during Tuesday and pushed to highs near the 78.70 level during the European session.
The data was undermined by weaker than expected consumer confidence data which undermined US yield support and pushed the currency back to the 78.40 region.
There will be further concerns surrounding US and Euro-zone fundamentals which will provide underlying yen support despite a serious lack of confidence in the long-term Japanese fundamentals. The currency is also gaining support from buying against the Australian dollar.
Sterling dipped to lows below 1.5770 against the dollar on Tuesday before rallying back to the 1.5830 area as the currency was able to find support close to 0.7950 against the Euro.
There was another monthly decline in the Hometrack price index which had some impact on sentiment. There were also still important reservations surrounding the UK growth, especially with a sharpening debate surrounding the need for additional growth measures, but this was offset by expectations that the ECB would boost monetary policy. Any action by the ECB would limit the impact of any further Bank of England action to boost quantitative easing.
There was an improvement in risk appetite during the day which provided some degree of support for Sterling as equity markets gained support with narrow ranges discouraging selling pressure.
The dollar hit resistance in the 0.9630 area against the franc on Tuesday and weakened to lows around the 0.9550 level during the US session. The Euro dipped to lows around 1.2007 against the Swiss currency and was able to secure only a marginal recovery.
There was a stronger than expected reading for the Swiss employment data which will provide some degree of support surrounding the economy. In this context, the KOF index will be watched very closely on Wednesday for further evidence on economic trends and a robust reading would ease competitiveness fears slightly.
The Australian dollar found support below the 1.0350 level against the US currency on Tuesday and edged back towards the 1.04 level although the currency was unable to make any impression on key resistance levels.
There were further concerns surrounding the global growth outlook which had a significant impact in underlining underlying currency support, especially with continuing fears that the commodity boom had peaked. A decline in second-quarter construction orders reinforced economic doubts and helped push the Australian currency slightly weaker.