Optimism That Economic Conditions Are Improving Slightly

EUR/USD

The dollar found support weaker than 1.4050 against the Euro ahead of the FOMC statement on Wednesday with a covering of short positions in evidence, but there was solid Euro support close to 1.40 as underlying US sentiment remained negative.

The US economic data was firmer than expected and offered mild support to the currency, although the impact was limited. The ADP report estimated a 43,000 increase in private-sector employment for October after a revised 2,000 decline the previous month while the ISM index for the services sector rose to 54.3 from 53.2 previously. Both releases will create some optimism that economic conditions are improving slightly, but the data was over-shadowed by the Federal Reserve meeting.

In its statement, the FOMC remained concerned over the weak pace of growth with business investment slowing over the past few months. The Fed announced that it would buy an additional US$600bn in long-dated US Treasury bonds in the period until the end of June 2011 with planed purchases of US$100bn per month. Hoenig dissented against the majority as he has consistently over the past 12 months.

The Fed's determination to press ahead with further quantitative easing had a negative impact on the dollar and it weakened to fresh 10-month lows near 1.42 before a recovery back to near 1.41. The Fed move will certainly maintain a high degree of risk associated with the dollar with a lack of yield support and fears over long-term debasement.

There will also be unease over the Euro-zone economy as internal yield spreads continue to widen and this will be important in dampening the scope for Euro gains.

Source: VantagePoint Intermarket Analysis Software

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Yen

The dollar found support above 80.50 in European trade on Wednesday and then advanced strongly to a high near 81.50 with some technical buying of the US currency.

The Fed commitment to quantitative easing will tend to boost global demand for carry trades which could trigger some underlying selling pressure on the Japanese currency.

There was caution ahead of the Bank of Japan policy meeting given the potential for a further round of quantitative easing to be announced by the central bank. Markets also remained sensitive to the potential for central bank intervention.

Given the lack of yield support, the dollar failed to hold its best level and dipped back towards the 80.80 area in Asian trading on Wednesday. 

Sterling

Sterling gained an initial boost from a stronger than expected PMI report for the services sector as the index advanced to 53.2 for October from 52.8 the previous month. The report still suggests that the services sector is finding it difficult to gain any momentum as it is hampered by weak spending and investment levels.

The recent data will, however, continue to dampen any expectations of further Bank of England quantitative easing and Sterling pushed to a 10-month high above 1.6150 against the dollar before correcting weaker.

A steady policy by the central bank on Thursday would provide underlying Sterling support while any decision at this stage to expand quantitative easing would trigger very heavy selling pressure on the UK currency. Overall volatility is liable to remain higher in the short term.

Swiss franc

The dollar found support below 0.98 against the franc in Europe on Wednesday, but was unable to make any headway and dipped to lows near 0.97 following the Federal Reserve interest rate decision. The franc secured a generally robust tone against the Euro despite a firm Euro elsewhere on the crosses.

Domestically, there was a 3.8% annual increase in retail sales for September which should provide some degree of support for the franc, although the impact will be limited given recent mixed data.

Trends within the Euro-zone bond markets will provide some degree of support for the franc on defensive grounds and there will be fears over G7 currency debasement which would also trigger some underlying franc support.

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Australian dollar

The Australian dollar maintained a firm tone during Wednesday with limited retreats held to near 0.9960 against the US currency. A weaker US currency and an improvement in risk appetite pushed the Australian dollar firmer following the FOMC interest rate decision and the currency peaked at a fresh 27-year high above 1.0060 against the US dollar.

There was further speculation over aggressive fund demand for commodities which helped support the Australian dollar. There will still be the risk of volatile trading given underlying stresses within the global economy and a weaker than expected retail sales report dampened currency demand to some extent.