Friday June 24, 2005 - 09:31:20 GMT
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INVESTICA Ltd - www.investica.co.uk
Markets test Euro support
The Euro remained under pressure for much of Thursday, undermined by further speculation over a cut in Euro-zone interest rates. The Euro weakened to a low of 1.2025 and was unable to make a significant recovery in New York. The Euro also briefly weakened to below the 1.20 level in Asia on Friday, but recovered back above this level in early Europe on Friday. Volatility is likely to remain high in the short term, especially with pressure to cut speculative positions ahead of the weekend.
Euro confidence is likely to remain very fragile in the short term and the currency will be vulnerable to further selling pressure as interest rate speculation will continue. Confidence was undermined by a decline in Italian consumer confidence to a 10-year low. The ECB will, however, continue to battle against market expectations as it wants to keep all options open.
The US data was slightly stronger than expected with jobless claims falling to 314,000 in the latest week from 334,000 the previous week which will boost optimism over the labour market while the housing data remained firm. There will be strong confidence that the US Federal Reserve will increase interest rates by 0.25% next week and this will reinforce the dollar's short-term yield advantage against the Euro.
Oil prices will need to be watched closely after an increase to a record US$60 p/b on Thursday. There was also a sharp decline on Wall Street and this combination could pose significant risks for the dollar in the medium term, especially if high oil prices are sustained. In particular, sustained increases in oil prices would increase the possibility of a pause in Fed tightening.
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