EUR/USD
The Euro maintained a strong tone in European trade on Monday and a fresh move above 1.40 triggered stop-loss buying which pushed the currency to fresh four-month highs near 1.4040 against the dollar.
The Euro-zone economic data remained generally encouraging with the Sentix business confidence index at a 30-month high for February as the German economy continues to lead the region. Monetary policies also continued to have a big impact with the Euro still gaining important support from strong expectations that the ECB will increase interest rates at the April meeting.
The Euro was also resilient in the face of a big downgrade for Greece's credit ratings. There were, however, also fears that debt and sovereign rating fears would return to undermine the Euro. Recession conditions remain entrenched in the peripheral economies and any move to increase interest rates would tend to reinforce downward pressure on growth and intensify further debt write-downs.
Markets are also uneasy over the potential for popular protests within Greece while opposition to any easing of Euro-zone bailout terms is liable to increase within Germany. There has been renewed evidence that funds are selling Euro-zone bonds which will tend to unsettle the Euro.
There were no major US economic data releases during the day and the dollar was still hampered by expectations of a dovish Federal Reserve policy. There is, however, a large speculative short dollar position which will maintain the potential for a short-covering rally. The Euro retreated to lows near 1.3950 before finding fresh buying support.
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Yen
The dollar found support on dips to 82 against the yen during Monday, but it was unable to make strong headway and was capped below 82.50.
There was evidence of exporter selling on any dollar gains and there will also be a continuing capital repatriation over the next few weeks, especially with the fiscal year-end at the end of March. These flows will maintain the potential for yen buying over the next two weeks.
The domestic data recorded a further contraction in bank lending while there was also a weaker than expected current account surplus, but the impact remained limited. The dollar nudged higher in Asian trading on Tuesday with yield spreads still helping to protect the currency.
Sterling
Sterling pushed to a high close to 1.6340 against the dollar in European trading on Monday as the US currency remained firmly on the defensive, but there was a sharp reversal during US trading as the UK currency retreated to lows below 1.62.
The failure to break resistance levels above 1.63 triggered selling pressure while a decline against the Euro also had a negative impact.
The economic data releases were mixed as the RICS house-price index recorded a small improvement to -26% for February from -31% the previous month, although this still indicated that prices were falling. There was also a deterioration in the BRC retail sales index with a reported 0.4% decline in sales in the year to February from a 2.3% gain the previous month. There has been evidence of a significant slowdown in retail sales and there will also be speculation that unease over domestic weakness will prevent the Bank of England from raising interest rates.
There is still likely to be a reluctance to sell the currency aggressively ahead of the Thursday March MPC interest rate decision. Sterling remained on the defensive during Asian trading on Tuesday.
Swiss franc
The dollar found tentative support below 0.9250 against the franc during Monday and rallied to the 0.9270 area in choppy trading conditions. The Euro found support near 1.2920 against the Swiss currency, but was unable to make much impression.
The Euro has been broadly resilient in the face of renewed unease surrounding the Euro-zone debt position, but there will still be the potential for defensive safe-haven support for the Swiss currency, especially if there is any increase in fund outflows from the Euro area.
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Australian dollar
The Australian dollar pushed to a high close to 1.0180 against the US currency in Europe on Monday as the US currency remained firmly on the defensive. It was unable to break above the resistance zone and weakened back to the 1.0110 area late in the US session.
Underlying risk appetite remained fragile which curbed demand for the Australian currency, especially with speculation that the Chinese central bank was set to tighten monetary policy again this week which would tend to put commodity prices under pressure.
There have been some negative reports surrounding the domestic economy and overall confidence remains weaker.
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