Credit rating in the US at risk

For the last 18 months it has been European leaders that have drawn the ire of markets and voters across Europe for their handling of the sovereign debt crisis that has been roiling financial markets. It would seem that US politicians have been taking lessons from their European counterparts if the handling of the debt ceiling negotiations is anything to go by, as they continue to play party politics with the credit rating of US economy.

For the moment markets aren’t showing too much signs of distress, apart from a slide in the US dollar, and limited upside in equity markets.

That could quickly change if politicians show no signs of putting financial stability before their own egos and the politics.

 Elsewhere inflationary pressures continue to dominate sentiment, not only in Europe but in Asia as well after yesterday’s surprise 50 basis point rate hike by the Reserve Bank of India in response to rising inflationary pressures in the Indian economy.

In Australia the Australian dollar hit record highs against the dollar after CPI numbers came in much hotter than expected rising to an annualised 3.6%, and putting rate rises back on the table after last weeks fairly dovish note from Westpac.

 In Europe inflation seems to be fairly well contained despite the continued hawkish rhetoric from European Central Bank officials.

Comments from ECB member Noyer saw the euro gain ground yesterday, when he claimed that the ECB remained in a state of “strong alertness”, and not “strong vigilance” as had been previously reported.

The poor choice or interpretation of these words was illustrated during the day when Spanish and Italian T-bill auctions showed higher yields, with Spanish yields hitting three year highs.

Today’s German CPI figures for July are likely to show that inflation remains fairly benign at 2.4%, unchanged from the previous two months, while import prices are expected to have declined by 0.2% for June.

In the UK the pound is likely to remain in the spotlight after a collective sigh of relief from the markets when Q2 GDP numbers came in as expected at 0.2% with a strong showing from the services sector.

While these figures have raised concerns in some parts about a slide back into contraction, the Chancellor’s room for manoeuvre with respect to easing policy is virtually zero, when one looks at the problems in Europe and the US.

If he wants to keep the confidence of the bond markets and borrowing costs low he doesn’t have much of a choice either.

Today’s CBI industrial orders for July are set to keep the focus on this low growth story with orders expected to slip into negative territory to -3 from Junes +1.  A negative number would raise concerns of a poor start to the third quarter and a contraction in the economy.

US durable goods for June are also expected a continued slowdown in the US economy with a rise of 0.3%, well down on May’s 1.9% rise.

 EURUSD – the likelihood for further gains in the single currency towards the July high at 1.4576 remains while above the 55 day and 100 day MA around the 1.4300/10 area. The move in Asia beyond trend line resistance at 1.4450/60 brings the 1.4500 level into play.

Beyond 1.4576 targets 1.4700, followed by 1.4875.

The euro should find support around the 55 day and 100 day MA both at 1.4305/10. Only a move back and close below 1.4300 would reopen a test of the downside, back towards 1.4150.

 GBPUSD – yesterday’s move above the 61.8% retracement level of the down move from the highs at 1.6745 to the recent 1.5780 lows at 1.6380 has the potential to target the May highs above 1.6500.

Any pullbacks should find support above the 1.6260 area which was the 50% retracement of the same move. There is also interim support around the 1.6360 area.

If the pound slips below 1.6250/60 then we could well get a move back towards 1.6180/1.6200 which acted as strong resistance for most of last week. Only move below 1.6180 retargets the 1.6080 pivot.

 EURGBP – yesterday’s break in Asia above the 0.8850 level has so far stopped short of the 0.8895 level which is the 50% retracement level of the down move from the 0.9085 to the lows last week at 0.8705.

A break here would then target the 0.8940 area, which is the 61.8% retracement of same move. Intraday trend line support from the 0.8705 lows last week can be found around 0.8820 level. A break below 0.8820 retargets the 0.8770 area.

 USDJPY – the dollar continues to lose ground against the Japanese yen, putting in new lows every day as it closes in on the all time lows at 76.25.

Yesterday’s brief spike to 78.65 was swiftly reversed and this remains a key obstacle to a return towards the May lows of 79.50/60, which had acted as fairly strong support after the co-ordinated intervention earlier this year.

Yet another new low at 77.75 keeps the bias firmly to the downside as the all time lows below 76.50 remain a key target, however with the threat of intervention hanging over the market; it could well be susceptible to sharp short squeezes of the type we saw earlier this week.

 Equity market calls

FTSE100 is expected to open 10 points lower at 5,920

DAX is expected to open 18 points lower at 7,331

 Today’s FX commentary provided by Michael Hewson, Market Analyst at CMC Markets.

 

About benlebrun

Market analyst at CMC Markets
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