The dollar reversed overnight losses and gained against its counterparts on Tuesday after US consumer sentiment unexpectedly declined. The weaker consumer sentiment increased risk aversion and the chances of a consumer-led economic recovery. The weak labor market is weighing on consumer spending. Thursday’s US employment report by the Labor Department will be an important indication of consumer spending. Tomorrow we will get the first indication of the US employment situation with ADP’s US employment forecast. A number below 300K losses will increase risk appetite and pressure the dollar while a larger than 400K decline will reduce risk appetite and strengthen the greenback. The euro declined on increased risk aversion and a report that eurozone CPI fell for first time ever. The European Central Bank’s inflation target is 2% and yearly modest deflation is likely to induce the ECB to keep rates low for the foreseeable future. The Australian dollar fell, while the Canadian dollar broke important support indicating further weakness.

The GBP/USD broke the 1.66 resistance and hit an 8-month high before a dramatic about-turn after worsethan- expected data forced investors back into dollar havens. Improving UK consumer confidence and rising UK house prices encouraged risk-taking, while the weakest UK GDP in over 50 years and falling US consumer sentiment pressured the pair. Sterling, like other currency pairs, has been flat lining, with the price direction closely correlated to risk sentiment and equity markets’ direction. This pattern is likely to continue.