The US Dollar gave back some of its recent gains yesterday despite continued disappointing US economic data, as the single currency looked to regain some of its equilibrium after the battering of the last few days.

Traders decided to shrug off disappointing US manufacturing and housing data that pointed to continued weakness in the economy.

However despite this abatement in risk aversion the Japanese Yen, Swiss Franc and gold have continued to look strong as FX spread betting safe haven plays. This is especially true against the Euro, which continues to be dragged down by sovereign debt concerns and fears about the European banking sector. Irish and Greek CDS spreads have continued to widen as their debt insurance continues to rise in cost.

The Pound spread betting market also had a bit of an up and down day yesterday after weak housing data saw the Pound slip early on.

However it continues to remain strong on its trade weighted index continuing to make fresh 11 month highs.

UK inflation data for July out today will be a key test for Sterling as well as for the Bank of England’s credibility with respect to its inflation forecasts. What isn’t in doubt is that Mervyn King will probably have to pen another letter to the Chancellor of the Exchequer about another missed inflation forecast.

The hope is that the recent trend in prices continues to decline with expectations for CPI to show a month on month decline of -0.2% and a year on year figure of 3.1%, while RPI is expected to be flat month on month, with a year on year figure remaining at 5%.

In the US producer price data for July is due out with expectations of an increase in the month on month figure from last months -0.5% decline to a figure of +0.2%.

US housing starts will also be closely scrutinised after yesterday’s disappointing National Association of Home Buyers index data for August, which showed activity at its lowest levels since March 2009 at 13.

US Industrial production data for July is also expected to show an increase of 0.5% for July, up from June’s figure with capacity utilisation showing a figure of 74.5%.

In Australia the Reserve Bank of Australia released its August meeting minutes and was shown to be fairly positive about the Australian economy, leaving its growth forecasts of between 3.75% and 4% unchanged. Although it did acknowledge the uncertainty in the global outlook and, as such, it remained confident that rates would remain unchanged in the short term.

EURUSD – not unexpectedly given the strength of last week’s declines we have seen the single currency sustain a minor rebound back above $1.2850 towards $1.2900. There is a larger resistance level above the $1.2950 area at $1.2980 and while below here downside pressure should continue to predominate.

The next support level sits around $1.2715/20 which is trend line support from the $1.1880 lows, and then at $1.2605, 50% retracement of the earlier mentioned move. The bearish engulfing week on the weekly candle charts is a significant sell signal and could well signal further losses towards $1.2450 as a precursor to a revisit of the $1.2150 area.

GBPUSD – yesterday’s rally off the $1.5535 lows saw the Pound rally back towards $1.5700 but fall a little short of the $1.5730 resistance yesterday.

Last weeks bearish engulfing week candlestick will continue to weigh on the Pound but it does continue to hold above the support levels between $1.5510 and the $1.5550 area.

The rising trend line support, now around $1.5590/00, from the June lows at $1.4350, was breached briefly yesterday and though it broadly remains intact for now its longer term resilience has to be questioned. The bigger levels remain between the old 50% Fibonacci retracement level at $1.5550, while below that at $1.5505 there is the 200 day moving average.

A break and close below the 200 day moving average would be negative for Sterling and open up the risk for further losses towards $1.5320 which would be a 38.2% retracement of the up move from the $1.4230 lows to the recent highs around $1.6000. Expect to find resistance on any rallies towards $1.5730 and $1.5820.

EURGBP – having broken below £0.8200 the Euro continues to look weak against the Pound as it looks to head towards the previous lows around the £0.8065/70 level.

It has found some intraday support around the £0.8170 area, however while below resistance around the £0.8240 level, we should expect to see further declines. Only a move beyond the £0.8300/10 level would call into question a re-test of the lows.

USDJPY – the Dollar has started to tread water between the resistance highs around the ¥86.25 level and the fairly solid support around the ¥84.70/80 area as traders remain concerned about what steps Japanese officials may take with respect to any further Yen gains.

Only a rally beyond the ¥87.00 level, the May flash crash lows could prompt an unwinding of Yen long positions. Any physical intervention looks unlikely until we get a little nearer the ¥80.00 area.

In the absence of any physical intervention, there is a good chance of seeing a re-test towards the 1995 levels just below ¥80.00.

By Michael Hewson, Market Analyst, CMC Markets.

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