Asian trading on Tuesday was dominated by the Reserve Bank of Australia monetary policy decision as the bank left benchmark interest rates on hold at 2.75%. In its policy statement, Governor Stevens stated that there was some scope for interest rates to be cut further if required. There were also comments that further depreciation of the Australian dollar was both possible and desirable. These comments were particularly damaging for the local currency as AUD/USD retreated to re-test 34-month lows below 0.9150.
EUR/USD initially held steady and attempted to gain ground following a larger than expected decline on seasonal grounds in Spanish unemployment. Technical factors remained very important as the Euro attempted to take out resistance levels above 1.3070. Again, resistance proved too tough to break down and EUR/USD retreated again. Selling pressure increased ahead of the US open with a renewed test of the key 1.3000 support area.
Euro sentiment was damaged by fresh tensions surrounding Greece and Portugal with the troika warning over Greek reform progress with media reports of a Monday deadline for greater progress while the Portuguese Finance Minister resigned over austerity measures. There were also some reports that the ECB would look to give more detailed forward guidance following Thursday’s council meeting with an effective pledge to keep expansionary monetary policies for an extended period.
The dollar secured fresh all-round support as the trade-weighted index looked to break towards May’s highs. In this context, USD/JPY challenged and broke above the 100 level for the first time in four weeks as underlying yield trends remained supportive. Trading conditions were still generally cautious ahead of key event risk later in the week. EUR/USD was able to find support just below the 1.3000 level with sellers unable to trigger any downside momentum below 1.30.
The UK PMI construction index was marginally weaker than expected with a reading of 51.0 for June from 50.8 previously. This was the second successive reading above 50 as residential output strengthened. This maintained the recent evidence of an improving trend in the housing sector and there was also a more optimistic survey from the British Chambers of Commerce (BCC) with particular optimism surrounding exports.
For the second day running, Sterling was unable to take advantage of generally favourable data. GBP/USD was unable to regain the 1.5250 level and, after a retreat to the 1.5185 area, a break triggered stop-loss selling with a decline to four-week lows below 1.5150.