The euro faces a test of its resilience later on Thursday when ECB President Trichet is likely to discuss the outlook for inflation into 2012 in light of a well-flagged quarter-point tightening in monetary policy. The single currency has been harassed by traders following a relief rally in positive response to the Greek austerity bill, yet slipped following the ECB meeting touching its weakest value against the dollar in a week. If Trichet gets tricky over potentially defaulted Greek collateral, should such an event unfold, or discuss a lower projection for inflation into next year, the euro could face a new wave of angst for the euro.
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Euro – The single currency was lower ahead of the ECB’s monetary tightening that widened its cushion over the dollar to as much as 1.50% for fears that the differential might not widen further especially should Trichet point to a return to below 2% for the pace of consumer prices next year. His words last month when he flagged a July rate rise sent the euro tumbling as investors began to realize that the tightening cycle would be modest. The euro has suffered in recent days as discussion evolves surrounding the exact definition of a sovereign debt default. Trichet could shake the hornet’s nest at the press conference by warning that Greek paper declared in default by any of the ratings agencies would no longer be acceptable collateral at the ECB. The euro fell to $1.4250 ahead of the conference.
U.S. Dollar – The dollar index added to midweek gains as the euro slumped and as yields on benchmark government bonds reversed gains narrowing the yield differential in favor of the greenback. The index rose to 75.28. A survey of private employers’ payroll data from ADP showed a far-greater increase in jobs growth during June coming in at 157,000 and ahead of an expected reading of 70,000. The report will build a positive tone for the dollar ahead of Friday’s official government report, which is a broader reading of the health of the economy. Initial jobless claims data also fell faster than expected to 418,000 but primarily as a result of a revision to earlier data. At 418,000 last week’s reading remains insufficient to generate a healthy job gain in the second half of the year.
Canadian dollar – Growth-sensitive units were spurred by rebounding commodity prices led by copper and crude oil on hopes that an earlier-in-the-week rate rise in China may be the last for 2011. The Canadian dollar rose to $1.0390 ahead of data covering new home prices for May. Friday delivers the June employment report ahead of that of the world’s largest economy.
Aussie dollar –Gains were sparked for the local dollar following a 23,000 net gain in Australian employment during June. Prompted by a sharp upwards swing in full-time jobs, the report marks a shift from two consecutive monthly declines in the reading of the labor market. The May report was revised to a small net loss, which also ate in to Thursday’s gains for the Aussie. Nevertheless, it still rose to $1.0750 as risk appetite returned.
British pound – The Bank of England left monetary policy unchanged on Thursday, also leaving its asset purchase program at £200 billion. The pound lost ground against a strengthening dollar after earlier reports showed a mixed bag of data. While industrial production fell short of forecast during May, manufacturing exceeded expectations and rebounding from a contraction in the prior month. The pound eased to $1.5952 while it gained per euro to 89.20 pence as the single currency took an all-round hit.
Japanese yen – The yen slumped against the dollar after the ADP report with the dollar slicing through a two-week high like a hot knife through butter. The yen was broadly unchanged throughout the European session following the release of a machinery orders report that confirmed a rebound in domestic demand. The yen slid to ¥81.40 in early New York trading.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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