Following very sharp moves during US trading on Monday, consolidation was the general theme on Tuesday, especially with caution in evidence ahead of key events later this week with the US payroll report on Friday.
There were no surprises from the Reserve Bank of Australia (RBA) as interest rates were left on hold at 2.75%. The bank continued to indicate that there was scope for further rate cuts if necessary, maintaining the generally dovish tone seen during the past few meetings. AUD/USD was unable to hold above the 0.97 level following the RBA decision and dipped to test support levels below 0.9650.
A sharper than expected decline in Spanish unemployment of over 90,000 provided an initial boost to the Euro on hopes that conditions within peripheral economies were starting to stabilise. The data is, however, both erratic and not seasonally adjusted and the adjusted jobless decline was marginal. EUR/USD pushed higher to challenge the 1.31 area, but was unable to break through with evidence of increased underlying supply and Asian sovereign Euro sell orders.
The latest US trade account release was slightly better than expected with a deficit of US$40.3bn for April from a revised 37.1bn the previous month as exports advanced to near-record levels. The data maintained expectations of an underlying narrowing of the structural deficit.
Later in the US session, there were reports from ECB sources that there were divisions within the central bank over the potential for further interest rate cuts. There were concerns that negative deposit rates may not have the desired effect in boosting lending and that a policy of narrowing the rate corridor may have greater merit in attempting to boost the economic performance. The bank is also extremely wary of the moral hazard situation as it wants to maintain pressure on governments for reform.
The Euro initially spiked higher following the ECB reports, but quickly faded again to test support below the 1.3050 area. With buying interest at lower levels, the Euro consolidated around the middle of daily ranges with USD/JPY battling to stay above the 100 level at the European close.
The UK economic data was again better than expected with a rise in the PMI construction index to 50.8 for May from 49.4 the previous month as the residential sector expanded, although other sector continued to contract. Sterling gained an initial boost but, in contrast to Monday, it was unable to sustain the advance as GBP/USD held close to 1.53 with a reluctance to maintain positions ahead of Thursday’s Bank of England policy meeting.