Little change on EUR/USD

The euro rose slightly against the US dollar yesterday as improved risk appetite continued, however its gains were capped as investors braced themselves for several important announcements due later today. In particular, speculation surrounding the results of US government “stress tests” on nineteen major American banks weighed on investors’ minds, especially after a source close to the tests said Bank of America could require as much as $34 billion in additional capital should the recession take a turn for the worse. According to reports, the ten banks thought to require additional capital will be given one month by the US government to find the necessary cash or be forced to accept a bailout from taxpayers. Markets were also cautious ahead of the European Central Bank’s monetary policy decision due later today, with some analysts predicting the bank may embark on a quantitative easing program similar to that adopted by the US Fed and the Bank of England last year. However, the greenback’s early gains against the single currency were capped to some extent following the release of some better-than-expected data in the eurozone, raising investor hopes that a global recovery may be tentatively underway. The European Monetary Union’s Purchasing Mangers’ Index for services rose unexpectedly in April to record its biggest one-month increase since December 2001, up from 43.1 in March to 43.8. However, a brief rally by the euro was soon halted after worse-than-expected Retail Sales data in the region reduced risk appetite in the market. March’s Month-on-Month sales figures fell by 0.6%, down from -0.3% in February and far worse than the 0.1% increase expected, whilst the Year-on-Year figure came in at -4.2%, far lower than the -2.6% analysts had predicted. This data, together with speculation surrounding the two potentially market-moving announcements due later today, meant the greenback went into lunch up against the single currency.

However, much better-than-expected American ADP Employment Change data released early yesterday afternoon strengthened the euro significantly, completely wiping out the greenback’s earlier gains. April’s fall off 491k was far ahead of the -644k analysts had predicted and much better than the 742k fall the month before. This buoyed investor confidence, with some feeling a global economic recovery may not be too far off and therefore they bought into the perceived “riskier” single currency. However, in late trading, most of the single currency’s gains were cancelled out as the euro came under increased selling pressure ahead of the ECB’s interest rate decision later today, although it still finished the day up at 1.3332.

In early trading today, the euro has weakened significantly against the dollar this morning as investors look to the perceived safe-haven of the greenback ahead of some major announcements. In America, First Quarter Non-Farm Productivity figures are due to be released at 13.30 BST, whilst a speech by Fed Chairman Ben Bernanke will take place at 14.30 BST. The results of US government “stress tests” are also due at some point today. In the eurozone, German Month-on-Month and Year-on-Year Factory Orders data for March is due at 11.00 BST, whilst at 12.45 BST the European Central Bank will announce its all-important interest rate decision. Finally, ECB President Jean-Claude Trichet will give a speech at 13.30 BST.