The euro broke the lower side of its $0.8460 to $0.8490 range, falling to a day's low of $0.8455, following a lower than expected decline in both Eurozone business and consumer confidence. The single currency also retested an earlier low of 104.72 yen after June's Business Survey fell to -7 from -5.0 and the Consumer Survey fell to -5 from -4.0 in May. However, losses were limited as traders reported little demand for fresh positions ahead of tomorrow's Independence Day Banking Holiday and Thursday's European Central Bank monetary policy meeting. In the meantime, EUR/USD is seen supported at 84.40 with the upside capped around 85.20. A break below 84.40 is seen calling upon seven-month lows around 84-cents, with an ensuing rebound to the 85-cent level.
The dollar also rose against the yen in European trade after falling nearly one yen overnight following Japanese Prime Minister Koizumi's remark that the government would not intentionally bring the yen lower. Yesterday's reported comment in the Financial Times came after the New York close, and drove the yen to a one-week high of 123.73 against the dollar and a two-day high of 104.91 against the euro by the Asian session. The yen then rose briefly in European trade, to a new high of 123.65 against the dollar and 104.72 versus the yen, but could not hold onto those gains. USD/JPY is now hovering around 124. Backing is next seen at 123.80 followed by today's low of 123.65.
Koizumi's comments surprised dealers who had assumed that his reform measures would force Japan to let the yen fall in order to boost exports as it slides into a recession. He did not say that the government is opposed to a gradual market-based weakening of the yen, but, last Friday's statement from Japanese Finance Minister Shiokawa hinted that it would have to happen slowly.
Many dealers suspected yesterday's Tankan report would be the catalyst for a break of 125, but in a classic case of "buy-on-the-fact", the yen reversed course after the survey came as bad-as-expected. However, the fundamental factors of the Tankan, which fell to -16 from -5, highlight the fact that Japan is slipping into a recession. For that reason, most dealers feel it is only a matter of time before the yen starts slipping again.
Nevertheless, the dollar's inability to break 125-yen is adding to its weakness and building a psychological barrier at that level. A break of today's low at 123.65 would send it back on a path to the June 26 low of 123.20. Moreover, traders who had hoped for further falls in the yen will start to unwind their short-yen positions if dollar/yen weakness continues.
The dollar's fall against the yen is also seen helping stem the euro/dollar losses. Today's business and consumer confidence numbers underscored yesterday's depressing PMI numbers, which fell for the third month to 47.9, its lowest level since the record low on December 1998. Despite beating expectations of a greater fall, the Eurozone June output index also fell to 48.8 from 49.4 in May, and new orders fell to 46.6 from 47.2, indicating a continuing downward trend. Adding to the negative sentiment, the Eurozone June employment index fell to 49.6 from 50.6 in May, the first contraction since May 1999-although unemployment remained stable at 8.3%.
In light of the rise in Europe's economic slowdown, another balk by the European Central Bank on Thursday will likely weigh on the euro. And, the lack of official hints that inflation and M3 are thought to have peaked this month at 3.4% and 4.9% respectively, lends to the belief that there will be no rate cut this week. In a poll taken last week, economists were evenly divided between no rate cut and a 25-bp cut at Thursday's meeting, but anticipate easing before the end of the summer-possibly in early August before the ECB begins its summer hiatus. Therefore, the debate continues over when, not if, the ECB will lower rates.
Meanwhile, the pound fell across the board today, losing nearly one cent to the dollar as heavy selling of the GBP/JPY cross was reported to have weighed significantly on sterling. Cable fell to a three-day low of 1.4090, while the euro was able to recover from yesterday's one-month lows around 59.55 pence to regain the 60 pence mark. The GBP/JPY cross itself fell to a 2-day low around 174.65 before recovering to around 175.
Supporting the pound is yesterday's stronger-than-expected UK manufacturing survey, which rose to 47.3, past expectations of it remaining unchanged at 46.4. But the manufacturing sector will likely continue to contract given that the Bank of England will not cut rates at this Thursday's meeting since the inflation rate rose unexpectedly to 2.4% in May. House prices in Britain also rose 1.9% in June to stand 9.3% higher than a year before, the Nationwide Building Society said earlier. The new figures are the strongest since January. In a poll taken last Friday, 29 out of 30 economists concurred that the MPC will hold interest rates steady for the second month at 5.25% at their meeting on Thursday. Upside is capped at 1.4130, 1.4155 and 1.4175. Support stands at 1.410 and 1.4050.
Today's economic data is not expected to stir the financial markets, which will close early for tomorrow's holiday.