If concerns about the US debt ceiling negotiations weren’t bad enough investors also got a taste of a deteriorating economic outlook after yesterday’s hugely disappointing durable goods numbers. Orders for June slipped back 2.1%, well below expectations of a rise of 0.3% in signs that the uncertainty surrounding the US’s fiscal situation is seeing a paring back in big ticket items. If that wasn’t bad enough the Fed’s Beige Book of industrial conditions for July showed that growth in many more regions was starting to slow in the face of a weak housing and employment market.
Politicians do appear to be making some progress, however a major sticking point would appear to be the Republican insistence of a second vote on a debt ceiling rise before the 2012 election. Given recent comments by ratings agency S&P this may not be wisest course of action by US leaders and could well precipitate a ratings downgrade in the coming months.
Hopes that the Eurozone debt crisis had receded into the background for a month or two soon got laid to rest yesterday, when Moody’s downgraded Cyprus due to its banks exposure to Greek banks debt. This was followed soon after by S&P downgrading Greece again with a negative outlook, as a result of the events at the recent EU summit.
The agency went on to say that Greece’s debt may well have to be restructured again, something that won’t have gone down well with Germany, given finance minister Schauble’s comments earlier in the day. He stated that the Greek restructuring agreed last week would be a one-off and that the EFSF would not have carte blanche to buy up debt on the secondary market and would not be given a blank cheque to do so. With economic data in Europe continuing to deteriorate there is a slow realisation that the current €440bn in the EFSF will be nowhere near enough to manage multiple bail-outs let alone a contagion to a stagnating Spain and Italy.
With parliamentary approvals in some EU countries not set to be finalised until October, more delay in passing last week’s measures maybe time the euro can ill afford.
In data out later today German unemployment for July is expected to shrink by 15k, though that may be as good as the good news gets with euro zone consumer confidence for July expected to remain at -11.4 reflecting the lack of confidence in parts of Europe as growth slows down and in some places starts to contract.
In the UK the pound has managed to find a measure of support from the problems in the US and Europe even though growth remains anaemic. CBI sales data for July is expected to improve to +2 for July from a negative reading in June.
In the US after yesterday’s dire durable goods numbers weekly jobless claims are set to be in focus once again with hopes that the numbers will continue to come down after last weeks 418k, with expectations of 415k.
EURUSD – the failure to re-test this months high at 1.4576 provoked a sharp sell off yesterday, however while above the 55 day and 100 day MA around the 1.4310/20 area, momentum remains positive.
Only a move 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. The daily candlesticks have posted a daily reversal however so we could well see the market break lower.
GBPUSD – cable’s break out to 1.6440 has prompted a pullback which could well see the pound pull back towards the 1.6260 area without undermining the previously positive momentum currently behind its recent gains.
The 1.6260 area was the 50% retracement of the 1.6745/1.5780 down move. 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 – the euro continues to trade in its broad range but we did get the break lower after pushing below the 0.8820 support area, before finding support around the 0.8770 area. A sustained break below the 0.8770 area opens up the lows this month around 0.8705.
Pullbacks above 0.8800 should be confined to the 0.8820/30 area and the 55 day MA, while behind that the main resistance remains at 0.8895.
USDJPY – the dollar continues home in on the all time lows at 76.25, putting in another new low at 77.55
This week’s brief spike above 78.50/60 remains a key obstacle for a move and return towards the May lows of 79.50/60, which had acted as fairly strong support after the co-ordinated intervention earlier this year. It should be noted that the threat of further intervention remains very likely and as such; 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 50 points lower at 5,807
DAX is expected to open 53 points lower at 7,200
Today’s FX commentary provided by Michael Hewson, Market Analyst at CMC Markets