Confidence in the US economy is likely to remain fragile

EUR/USD

The Euro held firm in Asian trading on Monday, consolidating around the 1.29 area against the dollar. The currency was still gaining some traction from relief that the bank stress tests had been completed without major damage to confidence.

ECB President Trichet stated that the tests were important for providing transparency, but there were still longer-term doubts over credibility of the tests with particular doubts over the levels of capital requirements. The more favourable recent growth data was at least as important in providing Euro support.

The US economic data recorded an increase in hew home sales to an annual rate of 330,000 for June from a revised 267,000 the previous month. Despite the monthly recovery, this was still the second lowest figure on record. Underlying confidence in the US economy is likely to remain fragile, especially with a decline in two regional manufacturing surveys.

Despite doubts over the economy, there was optimism over US corporate earnings following the Fed Ex results and overall risk appetite was still generally firm during the day which provided background support to the Euro. The currency advanced to test resistance levels in the 1.30 area and consolidated just below this level after meeting substantial orders.

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Yen

Confidence in the global economy remained stronger on Monday which dampened demand for the Japanese currency as Asian stock markets remained firmer. Domestically, the Your Party which secured gains in the recent Upper-House elections and could enter a coalition with the government called for aggressive measures to curb deflation which would include a weaker yen.

These comments helped weaken the Japanese currency with the dollar pushing to a high near 87.70 while the Euro strengthened to a 7-week high.

There was also some speculation that tighter regulations on margin trading would curb carry trades over the next few weeks and this provided some degree of yen support.

The dollar found support on dips to the 87 area and nudged higher again later in the US session as Wall Street secured a third successive daily advance.

Sterling

Sterling found support close to the 1.54 level against the dollar on Monday and there was persistent buying support during the day. The UK currency gained important support on the crosses with advances against the yen and Euro and this helped underpin Sterling against the dollar.

The latest Hometrack housing data maintained some degree of unease over trends, but the impact was limited at this stage as markets were still in buoyant mood following Friday’s GDP data. There are still important underlying doubts surrounding the UK economy and confidence could still deteriorate sharply over the next few weeks if confidence surveys start to weaken.

Global risk appetite trends were also important and Sterling benefitted from a mood of optimism. In this environment, there was a challenge on 3-month highs above 1.55 against the dollar during the US session. There were reports of option barriers in this region which triggered a limited retreat, but the currency held a firm tone.

Swiss franc

The Swiss franc came under some selling pressure against the Euro on Monday with a test of support levels close to 1.3625 against the Euro as the single currency continued to benefit from improved sentiment surrounding the banking sector. The dollar was able to push to a high around 1.0550 against the franc, but was unable to sustain the advance and retreated to just below the 1.05 level.

There has been an improvement in sentiment towards the Euro-zone economy following stronger than expected economic data and this has been important in curbing demand for the Swiss currency on defensive grounds, especially as risk appetite has remained firm.

There will be some speculation of renewed franc use as a global funding currency, but sentiment could still reverse rapidly given underlying unease.

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Australian dollar

Despite a brief dip following weaker than expected producer-prices data, the Australian dollar maintained a firm tone on Monday. There was still an optimistic tone towards the global economy and this has been important in boosting demand for the currency.

Political developments will remain under scrutiny ahead  of the General Election on August 21, although the impact is liable to be limited.

As risk appetite remained firmer and there was fresh demand for high-yield currencies, the Australian dollar continued to attack the 0.90 level against the US dollar and pushed to a peak above 0.9020.