The dollar was mainly down this morning as risk appetite returned and equity futures are trading much higher foreshadowing a likely higher open at the starting bell. Data releases today could be quite significant with Existing Home Sales and Initial Jobless Claims headlining. Obviously Bernanke has his second day testifying in Congress so his comments will be closely scrutinized for any further clues as to Fed policy going forward. Up until now he has remained quite dovish saying that: “..even as the Federal Reserve continues prudent planning for the ultimate withdrawal of monetary policy accommodation, we also recognize that the economic outlook remains unusually uncertain,” and it is unlikely his stance will change very much today. The US, it appears is still caught in the tendrils of recession and however hard it tries it doesn’t seem to be able to get out. At midday the dollar was down against the euro to $1.2860 and ¥86.74 against the yen.

   The euro rallied after positive economic data showed that both the manufacturing and services purchasing manager’s indexes showed a gain above analyst’s forecasts. The Euro zone Composite purchasing manager’s index was up from 56.00 last month to 56.7 this month, with 55.5 expected. Euro zone industrial orders were also up from 0.6% last month to 3.8% this month with a minus figure expected. Don't forget, tomorrow is stress test day when all eyes will be on the results of how well the 91 banks from around Europe are faring. At midday the euro was trading up against the dollar at $1.2860 and up against the yen at ¥111.55.

   The pound rose after better than expected retail sales data which helped ease fears over a double dip recession. UK retail sales rose 1% in June, taking the annual rise to 3.1%, significantly better than the 2.4% advance that had been forecast. This comes after a lacklustre string of poor housing and trade figures. It will not be enough however to convince investors the UK is out of the rough, but it proved a positive ray of sunshine in an otherwise dismal data season. Sterling was up against the dollar at lunchtime trading at $1.5282 and was trading at £0.8414 against the euro.

   The yen lost ground this morning as a surge in risk appetite obliterated safe haven demand and equity markets rallied. The deputy governor of the BOJ, Hirohide Yagamuchi’s comments yesterday that the BOJ would not step in to interfere with the yen’s exchange rate were contradicted slightly by comments from the Vice Finance Minister, Motohisa Ikeda, who reiterated that excessive yen strength is undesirable to the country's recovery. Since then the markets have sold off, although the main mover for the yen remains perceptions of global risk and not the expectation or not of BOJ interference.At midday the yen was up to ¥84.14 against the dollar but down to ¥111.55 against the euro.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst