EUR/USD spent the initial phase of the European morning correcting higher in tandem with a move lower in US rates. The view that the market may have been premature in pricing in Fed rate hikes before the end of the year has been circulating. Nevertheless, EUR/USD had peaked by mid-morning unable to break through the 1.3960 level. This has led to another move lower with EUR/USD presently headed towards its overnight low around 1.3850.
The outlook for US rates remains the primary driver, but this week's news from the Eurozone has not been good and accounts for some of the downside pressure on EUR/USD. This week's warnings to Europe from the IMF to come clean on bank losses and yesterday's S&P downgrade of Ireland continue to be cited as negative EUR factors. The IMF news comes on the back of yesterday's talk that Germany's West LB was being threatened by nationalisation. This is likely a precursor to more bad news from the Eurozone banking sector over the coming months. This morning's much worse than expected 4.8% m/m decline in German April exports serves to highlight the difficulties that Germany's export led economy will have in shaking off the present downturn.
Sterling has won back some ground this morning on the back of last night's news that PM Brown has staved off a Labour party rebellion, at least for now. There is no change in the perception that Brown's days as PM are numbered or in the likelihood that Labour will lose the next general election. However, one survey has suggested that Labour's chances at the next election will be far greater with Alan Johnson as leader, news which will further undermine Brown's future. More incentive for the pound came in the overnight news of an improvement in the RICS house price survey. Cable managed to climb back above the GBP/USD1.6150 level early on, though a broad based USD recovery has subsequently prompted a move back below 1.6100. EUR/GBP has so far failed to hold below 0.8620.
The early move lower in USD/JPY ran into solid support in the 98.00/10 area. The overnight release of Japanese April leading indicators showed a slight improvement from Mar (at 76.5), but was weaker than expected. AUD/USD is little changed from last night's close.
This afternoon, the ABC consumer confidence number will be released.
