Daily Forex Overview

Previous session overview

On Monday, the dollar ended substantially higher against the British pound and the euro as concerns about the U.K. banking system and a ratings downgrade for Spain pressured those currencies and reinforced a recent return of risk aversion.

The euro fell more than 1 percent against the US dollar on Monday amidst deteriorating investor confidence and dour forecasts by the European Commission. EURUSD traded with a low of 1.3060 and a high of 1.3381 before closing the day at 1.3090.

Sterling was the main underperformer overnight with thin markets exaggerating moves. Equity market weakness prompted risk aversion flows into yen, sterling-yen hitting 14 year lows around JPY127.50, while euro-sterling continued to correct recent losses, edging up to stg0.9185 from early lows around stg0.9068. Cable was sold down from early highs of USD1.4441.

The JPY strengthened slightly against the USD to just above 90, before retreating to 90.50; a dismal set of data releases yesterday supports the likelihood of Japanese repatriation this year.

Slumping regional stock markets, repatriation flows into the U.S. dollar and a rush to unwind long positions sent the Australian dollar tumbling in Asia Tuesday, setting the scene for further losses offshore. The Australian dollar was trading at USD0.6588, down from USD0.6812. Against the yen, it was trading at JPY59.40, down from JPY61.87.

Market expectation

The euro continues Tuesday under pressure from the dollar and yen, as traders respond to the slumping economic prospects in Europe.

Pound easing toward reported demand level at USD1.4150, with earlier reports adding talk of stops placed through USD1.4120. One trader notes that a US investment house has put out a cable sell recommendation, seeing potential for a move down to USD1.3200.

EURUSD drops through the overnight lows at USD1.2974, with rate extending move below reported demand at USD1.2950 to USD1.2944. Markets reported to be thin which is seen adding to volatility. Rate currently trades back around USD1.2970. If rate can clear below USD1.2940 seen opening a deeper move toward next reported support area between USD1.2910/00.

An expected bounce in sentiment surrounding the inauguration of U.S. President-elect Barack Obama should soon be overshadowed by the rapidly blackening outlook for the world economy, further eroding commodity currencies, analysts said.

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