US Spending Data Was Stronger Than Expected

EUR/USD

After advancing strongly late in the US session on Friday, the Euro maintained a firm tone in European trading on Monday and challenged resistance levels near 1.4550 before drifting weaker.

There was a general improvement in risk appetite with further speculation following Bernanke's comments that the Federal Reserve would provide some form of additional stimulus following the September FOMC meeting. This speculation also undermined potential yield support which tended to undermine the US currency.

The US spending data was stronger than expected with a 0.8% recovery in consumer spending for July following the revised 0.1% decline the previous month. The core PCE inflation indicator was in line with expectations at 0.2% and there will still be caution that money supply and price indicators are not suggesting that a further monetary expansion is appropriate.

Within the Euro-zone, ECB President Trichet stated that underlying inflation risks were being re-assessed and that a new report would be available for the September ECB policy meeting. Trichet stated that inflation would remain above 2.0% in the short term, but there was further speculation that there would be a downgrading of internal inflation forecasts which would also trigger an ECB switch towards rejecting any further increase in interest rates.

There were further political stresses within Germany with several parliamentary deputies from the governing coalition, including several from Chancellor Merkel's own CDU party, suggesting that they would not support plans to expand the EFSF's role. In theory, the government can easily pass the legislation as the opposition parties support it, but failure to secure a majority from within the coalition would be extremely damaging and could force fresh elections.  In this environment, the Euro found it difficult to gain additional support and consolidated above the 1.45 level.

Yen

The dollar was unable to make any impression on the yen during Monday and was blocked in the 77 area despite finding some support on dips towards 76.60. Both currencies tended to weaken in tandem as defensive demand weakened as wider risk appetite improved.

The latest household spending data was slightly stronger than expected with a 2.1% decline in the year to July compared with a 4.2% fall previously, although there was an increase in unemployment to 4.7% from 4.6%.

There was further speculation that the government, almost certainly under new Prime Minister Noda will introduce new measures designed to weaken the yen or could take a more aggressive stance in weakening the Japanese currency and this did have an impact in curbing speculative yen demand to some extent.

Sterling

Sterling maintained a more solid tone against the dollar on Monday and pushed to a high near 1.6450 against the dollar, but it was unable to sustain the gains and drifted back to the 1.64 region as the Euro consolidated around 0.8850.  Sterling moves were inevitably subdued by the UK market holiday which severely curbed trading volumes.

Sterling did gain some support from an improvement in risk appetite, although the mood remained very cautious on domestic and international grounds.

The latest CBI survey for services-sector activity recorded a sharp deterioration in confidence with a serious deterioration in orders and this will maintain fears over the economic outlook. There will also be caution ahead of the important PMI manufacturing data due later this week as any further reading below 50 would damage confidence further.

Swiss franc

The Swiss franc remained under pressure on Monday as the dollar pushed to the highest levels in seven weeks with a peak above the 0.82 level while the Euro also strengthened to the highest level since late July with  a test of resistance close to 1.19.

There was a further decline in defensive franc demand as underlying risk appetite improved and there was an important covering of long franc positions from hedge funds which had an important impact in undermining the currency.

There was still underlying caution given the political stresses within the Euro-zone and tensions could flare-up again at any time, especially with unease over the banking sector.

Australian dollar

The Australian dollar continued to advance strongly on Monday and pushed to a high just above 1.0680 against the US dollar. The currency gained important support from an improvement in risk appetite as there was fresh demand for yield-based instruments, especially given increased speculation over additional Federal Reserve support.

The latest building approvals data did record a monthly increase of 1.0% following a revised 3.6% decline the previous month. Nevertheless, this was again weaker than expected and maintained fears over the domestic economic outlook.