FX news and analysis

USD

The dollar started Tuesday higher after concerns about the legality of the ECB's 'Outright Monetary Transactions' (OMT) - or bond purchasing programme - weighed on risk appetite. Reports that lawyers from the Bundesbank were studying its legality weighed on risk appetite, supporting the safety-linked dollar. It raised concerns that the Bundesbank might to force the EBC to scrap the plan. The dollar weakened later on Tuesday, however, after a mixture of ultra-positive data, showed a very substantial rise in Consumer Confidence to 70.3 from 61.3 previous – a nearly 10 point gain when only 2 had been expected - and comments from German Finmin Wolfgang Shaeuble in which he said defending the euro was “worth every effort.” Housing data, released on Tuesday, was overall better-than-expected with the S&P/Case-Schiller Home Price Index (Jul), rising to 144.6 versus 143.7 expected and 142.3 previous. The Composite 20 (Jul) yoy rising by 1.20% from 0.59% previously and 1.0% expected and the 20 City component rising by a lower-than-expected 0.44% versus 0.75% expected and 0.91% previous.

EUR

The euro grew stronger as the day progressed and risk appetite recovered. At the start it weakened after an article in a German newspaper reported that lawyers from the Bundesbank were examining the legality of the OMT or bond-buying scheme as it is otherwise known, which triggered concerns of court action. Critics argued the programme could pose a medium-term risk and there was no “easy exit” from the debt crisis. Supporters argued that the element of 'conditionality' meant it was not strictly speaking 'unlimited' and therefore acceptable. Greek fears weighed after the government said it might have to roll over recent debt with the ECB or raise additional financing to narrow the budget gap. Later the euro bounced back after positive data in the U.S and positive words from German Finmin Shaeuble, who said that saving the euro was “worth every effort”. Spain saw borrowing costs rise at an auction of short term debt, although Spanish 10-year yields eased to 5.729% - now well below the 6.0% danger level. On the data front German Consumer Confidence remained at 6.9, French Business Confidence remained at 90 vs 89 expected; Italian Consumer Confidence rose; French Production Outlook fell to -52 from -44 and Italian Hourly wages rose by 1.6% annualized in August.

GBP

The pound rose against safe-haven currencies on Tuesday but fell against the euro, after risk appetite increased following the release of better-than-expected data in the U.S which showed a spike in Consumer Confidence and a continued rise in House Prices. The pound continued to perform well overall, however, as BOE's Paul Tucker delivered a speech in which he endorsed the new Cash for Lending scheme and seemed to indicate the BOE was now less likely to use more QE. Data from the British Bankers Association showed the number of Loans for House Purchase rose above expectations in August to 30533 versus 28100 and 28750 previously. The fact they increased rather was a positive sign given muted credit expectations and further bolstered risk appetite. As far as the outlook for the rest of week goes, tomorrow remains flat but Thursday sees the release of GDP 2Q revisions, Current Account Balance and Business Investment.

JPY

At first, the yen gained strongly on Tuesday as euro-zone debt concerns led to a fall in risk appetite which supported the safe-haven currency. Lingering concerns about the German economy as a result of Monday's poor IFO Business Sentiment survey also continued to weigh, as did Spain's reluctance to request a bailout. An auction of short-dated Spanish debt drew lower-than-expected yields at auction on Tuesday. However sentiment rebounded after better-than-expected Consumer Confidence data in America and the S&P/Case-Schiller House Price Index also showed a rise. On the Japanese data front Corporate Service Price Index yoy (Aug) came out at -0.3%, in line with expectations whilst Small Business Confidence (Sep) rose to 45.1 from 44.8. Neither indicating a recovery, and the Corporate Price Index showing continued deflation.