Global growth concerns should continue to provide some further dollar protection in an environment of market uncertainties. Divisions within the Fed will create further caution over aggressive positioning with the dollar unlikely to make much headway. Sterling will remain generally vulnerable in choppy trading conditions, although selling looks to offer limited value without at least a small correction.

EUR

Confidence in the US economy will remain weak in the short term and there will be strong expectations of a further cut in interest rates. The spread of views within the Fed will create significant uncertainty over January's decision which will tend to deter aggressive position taking and a substantial amount of US deterioration is priced in.

There will also be further concerns over the Euro-zone growth outlook, especially with weak figures on retail sales over the past 24 hours, and this will provide some significant dollar protection. The US currency will still find it difficult to make more than marginal headway in the very short term given the lack of confidence in the US economy. Overall, there is scope for further dollar support close to 1.4750 in cautious conditions, but with only limited gains.

The dollar was confined to narrower ranges and technical trading on Tuesday with the US currency unable to break resistance levels below 1.4680. There was support close to 1.4740 with a lack of major fresh incentives to help guide the market.

US pending home sales fell 2.6% for November, but the October data was revised up to show an increase of 3.7% which will minimise the impact of the weaker headline data.

There will still be strong expectations of further interest rate cuts by the Federal Reserve as speculation over recession conditions persist. In this context, comments from Fed officials will remain under close scrutiny in the short term, especially with little in the way of fresh data.

In remarks on Tuesday, FOMC member Plosser stated that he was more concerned over the inflation outlook while the economy should revive over the second half of 2008. This is significant as further interest rate cuts now would not have any significant impact until after mid year.

Plosser's comments will cast some doubts on an aggressive Fed policy later this month, although he is a notable hawk on inflation and monetary policy and there are a wide range of views within the Fed. The net impact should be to offer some slight dollar support on reduced expectations of a 0.50% rate cut, but with weak sentiment. The dollar was unable to make any headway, holding around 1.4720 in early Europe on Wednesday and Bernanke's views will be watched closely on Thursday.

There was a further 0.5% decline in Euro-zone retail sales for November to give a 1.4% annual decline and this will reinforce expectations of an economic slowdown. There was also a further 1.2% drop in German retail sales for November, although the industrial orders data was robust. There will be caution ahead of Thursday's ECB policy decision and statement, but underlying caution over the Euro-zone economy is liable to continue which will restrain the Euro, especially given the particularly weak data on consumer spending.

GBP

There will be persistent expectations of a further deterioration in the UK economy in the short term and there will also be expectations that the Bank of England will cut interest rates aggressively this year. The decision this week will be very close which will ensure caution, but the UK currency will remain vulnerable.

Short-term fluctuations will also be determined by levels of risk aversion and Sterling will gain some support from any recovery in risk appetite. Overall, the UK currency is unlikely to make much headway and the 1.9650 level remains very important for the UK currency and failure to regain this level quickly is liable to trigger further selling towards 1.95. Sterling should find near-term support close to 0.75 against the Euro.

Sterling pushed to highs around 1.9820 against the dollar on Tuesday before drifting back to 1.9725 in US trade. Buying support faded while the UK currency also failed to sustain a recovery against the Euro with confidence weak.

The latest UK economic data was generally fragile with consumer confidence edging lower in December while there was also evidence of a slightly weaker labour market and subdued wage increases in the latest KPMG survey.

There will still be strong market expectations of an interest rate cut in the first quarter of 2008. The decision this week is liable to be very close with serious bank concerns over growth trends offset by unease over inflation. Sterling was initially little changed on Wednesday before weakening to test the important support level around 1.9650 against the dollar.

Overall confidence in the UK currency is likely to remain fragile and, although, any recovery in risk aversion would help trigger a renewed correction against low-yield currencies, there will be caution ahead of Thursday's Bank of England decision.

JPY

Domestic yields will remain at very low levels in the short term and, with no expectations of an increase in rates, the yen will remain vulnerable on yield grounds. The increased pace of domestic yen selling will tend to weaken the currency, although there will still be residual caution.

Any sustained drop in stock markets would also tend to support the Japanese currency. On a near-term view, the dollar has scope for further support towards the 108.50 level, although gains through 109.70 will be required to trigger further gains and resistance near this level is likely to hold in the short term.

The dollar was unable to push above 109.70 against the yen on Tuesday. The Japanese currency strengthened back to stronger than 109.0 in New York with the dollar unsettled by persistent rumours of difficulties at Countrywide Financial and a sharp downturn on Wall Street. Underlying growth fears were also still providing important yen protection.

The yen, in turn, was unable to sustain the gains and weakened back towards 109.60 in early Europe on Wednesday. The Nikkei index recovered from early lows which curbed immediate yen demand on risk grounds. There was also further evidence of the importance of retail yen selling in pushing the yen weaker as internal positions against the Japanese currency increased to a two-month high.

The impact was magnified by strong expectations that the Bank of Japan will not be in a position to increase interest rates over the next few months, reinforcing the lack of yield support.

CHF

The domestic influences will remain of secondary importance in the short term with near-term franc moves still dominated by degrees of risk aversion. The Swiss currency will gain support if there is a sustained drop in global stock markets, but these pressures will tend to be offset by the underlying easing of liquidity conditions which will tend to weaken the Swiss currency to some extent.

The dollar will look to secure support below the 1.11 level against the franc with recoveries liable to be capped near 1.12 at this stage. There is likely to be further near-term franc support close to 1.65 against the Euro.

The US dollar was blocked close to 1.12 against the Swiss franc on Tuesday and drifted back towards 1.1130 in subdued trading. The Euro also hit selling pressure close to 1.6450 against the franc.

Levels of risk tolerances remained a key factor for the Swiss currency and the franc weakened slightly as stock markets rallied.

There was still a high degree of caution over the situation and the franc regained ground in New York as US stock prices came under fresh selling pressure. The US currency resisted a decline through the 1.11 level on Wednesday in cautious markets, but the defensive to in European stock markets severely constrained selling pressure on the Swiss currency.