There will be further speculation that the US economy is heading for or already in recession. Global growth concerns should continue to provide some further dollar protection in an environment of market uncertainties. There is the potential for a further cautious recovery in carry trades after the heavy selling early in 2008, but rallies are still likely to be limited. Sterling will struggle to sustain any further significant short-term gains.

  • Markets will remain on high alert over comments from Federal Reserve officials this week
  • Comments from European and Japanese central bank officials will again be watched closely over the next 24 hours.
  • Carry trade developments and the trends in global stock markets will continue to have an important currency-market impact.


EUR

There will be persistent fears over the US growth trends and there will also be further speculation that the economy is already in recession. This will maintain pressure for further aggressive rate cuts by the Federal Reserve and the US currency will, therefore, remain vulnerable on yield grounds. There will also be growing unease over the global growth outlook with Euro-zone forecasts liable to be cut. Although the ECB will want to take a tough stance on inflation, the bank is likely to be constrained. In this environment, there should be a degree of dollar protection on unease over global prospects, especially if there is further talk of a fiscal stimulus. Overall, there is likely to be dollar support close to 1.4750 against the Euro with the US currency struggling to push though the 1.4630 region.

The dollar strengthened to highs near 1.4660 on Monday before consolidating around 1.4690 in subdued US trade. The dollar's ability to avoid further selling pressure following Friday's weak payroll report triggered some covering of short positions. Confidence is still very fragile with the US currency fluctuating around 1.47 in early Europe on Tuesday as caution prevailed.

There were no significant data releases on Monday and there was some speculation that the US administration would look to boost the economy through temporary tax cuts which helped underpin sentiment to limited extent. Persistent fears over the housing sector and increased speculation over recession conditions prevented a significant recovery in confidence.

Comments from Fed officials will be watched closely in the short term. In particular, any remarks from Fed Chairman Bernanke will be important on Thursday and any hints over an aggressive rate cut from Fed officials would tend to erode dollar support. Administration hints over aggressive tax cuts would provide some dollar support.

The Euro-zone business confidence index fell to 0.92 in December from 1.03 previously which will maintain concerns over a slowdown in Euro-zone growth.

Euro-zone inflation data will also be watched closely with producer price inflation again above the 4.0% rate for December. ECB President Trichet stated on Monday that growth risks were biased to the downside, but that there were also important inflation risks. Comments from ECB officials will continue to be watched very closely in the short term, although bank members will be reluctant to make substantive comments ahead of Thursday's interest rate decision.

GBP

Underlying economic fears will persist in the short term, especially with evidence of a slowdown in retail sales growth. The latest Halifax house-price data will provide some degree of relief and could also ease pressure on the Bank of England to cut interest rates again this week. The UK currency will also gain support if there is a sustained improvement in risk appetite. Nevertheless, Sterling gains are likely to represent a short-term correction rather than a longer-term recovery as the overall fundamentals are liable to deteriorate further. Sterling is liable to hit near-term selling pressure close to 1.9850 against the dollar and struggle to extend gains much beyond 0.74 against the Euro.

From lows near 1.9650 against the dollar on Monday, the UK currency pushed back to 1.9750 in choppy trading, but there was further evidence of rallies being sold into with Sterling drifting weaker in New York. The 1.9650 level will remain an important technical level for the UK currency as it was the low seen in August when the initial phase surrounding the sub-prime crisis erupted. Sterling found further support towards 0.75 against the Euro.

Sterling held its ground on Tuesday despite a weaker than expected retail sales report. The British Retail Consortium (BRC) reported that like-for-like sales were at a three-year low of 0.3% for December which reinforced fears over a slowdown in consumer spending. There will be strong market expectations of an interest rate cut in the first quarter of 2008 and a series of cuts for the year as a whole. The decision on Thursday is liable to be very close with bank unease over growth trends offset by persistent unease over inflation.

Sterling did receive a boost following a reported 1.3% increase in house prices for December according to the Halifax Bank. The data will ease immediate fears over the housing sector to some extent and could deter speculation over a rate cut this week, although it may only be a temporary respite as the fundamentals overall are liable to deteriorate.

JPY

Domestic yields will remain at very low levels in the short term with no expectations of an increase and the Japanese currency moves will tend to remain dominated by levels of fear in global markets. Any recovery in risk appetite would, therefore, tend to result in yen selling, especially if global stock markets advance. There is still likely to be a high degree of caution over the global growth outlook and, in this environment, the yen should be able to resist heavy selling pressure. A move above 109.70 against the dollar would, however, increase the potential for a further corrective move towards at least 110.50.

The dollar pushed higher to 109.30 in Europe on Monday as the correction continued from recent sharp losses. Thereafter, the yen moves were driven to a large extent by Wall Street movements with the currency fluctuating around the 109.0 level.

The yen edged weaker towards 109.50 against the dollar in Asian trading on Tuesday as stock markets attempted to rally. There was also further pressure for a technical dollar correction stronger after heavy selling pressure seen over the previous week.

There are still no market expectations that the Bank of Japan will increase interest rates from 0.50% in the first half of 2008. In this environment, the yen will tend to weaken if there is any significant easing of risk aversion and a recovery in global stock markets, especially with persistent selling of the Japanese currency by retail investors. General unease over global growth trends should still provide some important yen protection in the short term as US recession fears persist.

CHF

The domestic influences are likely to be limited in the short term with robust fundamentals providing underlying currency support. The near-term Swiss moves will still tend to be dominated by levels of risk aversion and any sustained easing of global growth fears, allied with rising stock markets, would weaken the Swiss currency. Nevertheless, the franc is unlikely to be subjected to heavy selling in the short term given that economic fears are liable to persist. In this environment, the dollar is likely to hit tough resistance on any gains towards the 1.13 level against the franc. There is also likely to be near-term franc support close to 1.65 against the Euro.

The dollar found support below the 1.11 level on Monday and pushed to highs near 1.1190 before consolidation close to 1.1160. The Euro strengthened back to 1.64 against the franc, but struggled to sustain gains above this level.

Some stability in global stock markets pushed the franc slightly weaker on Tuesday with the dollar looking to challenge 1.12 against the Swiss currency. Underlying risk aversion should continue to limit selling pressure on the franc, especially with investors still cautious over the global growth situation and the dollar drifted back towards the 1.1160 level in European trading.