EurUsd Trends in oil prices continued to have an important impact on the equity and currency markets during Tuesday, although the dollar overall tended to lose some ground as the Euro again proved to be resilient. There was no test of support in the 1.0800 area which discouraged fresh selling attempts as narrow ranges continued to prevail. US housing data remained generally favourable with a 0.5% monthly increase in the FHFA measure while the Case-Shiller index recorded a 5.8% gain in the year to November from 5.5% previously. There was a slightly weaker than expected reading for the Markit PMI services index at 53.7 from 54.3 previously and the Richmond Fed index retreated to 2 from 6 previously while there was a sharp decline in the Philly Fed non-manufacturing index. Consumer confidence improved to 98.1 for January from 96.3 with a slightly more confident labour-market assessment. There was caution ahead of Wednesday’s Federal Reserve statement with markets overall expecting some shift in a dovish direction given recent global developments, but no major U-turn by the Fed at this point. The dollar overall drifted back to the 1.0850 area against the Euro and the US currency will be vulnerable to heavy selling if there are hints that December’s rate increase could be reversed or if the statement highlights domestic and international vulnerabilities. A more positive assessment would provide firm support as the Euro consolidated just above 1.0850 on Wednesday with the dollar still trading below 100 on a trade-weighted index.
Jpy The dollar was able to recover from lows below the 118.00 level and pushed to highs above 118.50 before stalling. US bond yields were unable to make any significant headway which curbed potential dollar support as the 10-year yield edged back to just below the 2.00% level. Risk appetite remained firmer as energy prices continued to recover ground and the dollar made further attempts at breaking the 118.50 area without being able to make a sustained break. There was uncertainty ahead of the Federal Reserve statement on Wednesday and the Bank of Japan policy announcement on Friday, both of which could trigger a high degree of volatility, especially given the interaction with equity prices. The Nikkei index was able to register gains above 2.5% for the day, but US futures markets were lower and there was a further decline in China’s Shanghai index with the index now close to 50% lower from its June 2015 peak. The dollar dipped back to the 118.00 area before finding fresh support with the Euro above 128.00.
Gbp Sterling initially remained under pressure on Tuesday, but found support beyond 0.7650 against the Euro and below 1.4200 against the dollar as international influences dominated. Bank of England Governor Carney repeated his comments that the time was not right for raising interest rates and that rates could be cut if necessary, although he did not expect such a move while the bank was prepared to use counter-cyclical buffer measures is required. He also commented that he would decide whether or not to extend his term as Governor to eight years from five before the end of this year. Sterling was resilient after Carney’s comments and pushed steadily higher as global risk appetite improved. Sterling pushed to test resistance above 1.4350 against the dollar and traded at 10-day highs as the Euro retreated to 0.7550. Volatility is likely to remain high after today’s Federal Reserve statement with risk trends crucial.