There were further underlying concerns surrounding the Euro-zone peripheral economies on Friday which had some negative impact on the Euro. The Portuguese opposition leader called for the country’s bailout package to be re-negotiated which reminded markets over both the government’s tenuous grip on power and severe underlying stresses within the economy.
There were also some vague rumours surrounding another French credit-rating downgrade following on from Spanish rumours earlier in the week. Any rise in bond yields would have an important toxic impact on the peripheral economies, especially as banking-sector losses would increase again.
These concerns did trigger some selling pressure on EUR/USD as it failed to hold above the 1.31 level and there was a slide to the 1.3000 level early in New York. Markets were, however, cautious over pushing the currency lower given the currency’s general resilience to negative peripheral developments and there was also trepidation following the huge surge in EUR/USD seen on Wednesday. With a reluctance to maintain shorts, EUR/USD rallied back to the 1.3050 area.
There was a small decline in the US University of Michigan consumer confidence index to 83.9 in the preliminary July release from 84.1 previously while inflation expectations edged higher. Markets were waiting for comments from Regional Fed President Bullard late on Friday which could be important given that he dissented from the June FOMC statement. Crucially, Fed Chairman Bernanke will also testify to Congress next week.
The Australian dollar was again a big mover during the day as volatility shows no sign of ebbing in this currency. After failing to break above the 0.92 area overnight AUD/USD was subjected to very heavy selling pressure in Europe. There was no particular fresh news flow to trigger the selling, but there were further important underlying concerns surrounding a potential sharp slowdown in the Chinese economy and the impact on the Australian economy. Shorter-term players also looked to take out key technical levels and barrier support with a slide to fresh 3-year lows at the 0.90 level before a limited correction.
Concerns over the Chinese economy also had a significant on risk appetite as global growth fears persisted. In this context, USD/JPY was unable to make any impression on resistance towards the 100 level and retreated back to near 99 later in New York.
For the second day running, Sterling was broadly sidelined as it tended to track wider dollar moves. GBP/USD found support on dips to 1.5075 and rallied back above the 1.51 level.