Despite this weeks rally in equity markets, nervousness remains about what lies in store this Friday at Jackson Hole.
In Europe arguments about collateral, bailouts and the legitimacy thereof continue to be played out in the full glare of the markets, yet despite this, financial markets remain remarkably sanguine about it, with the euro continuing to hold up well despite continued deteriorating German economic data.
Warning signals in the banking sector in Europe continue to flash red with default insurance at its highest levels since 2008, for some banks and continued tightness in the credit markets.
Yesterday’s German IFO data for August fell short of expectations on all measures as concerns about a sovereign debt spill over, continue to dominate sentiment. The expectations index slumped to its lowest level for 2 years to 100.1, while German industrial orders also fell 0.7%.
Today’s Gfk consumer confidence data should give clues as to how all this has affected household sentiment with expectations of a fall to 5.1 from 5.4.
The German president also stepped into the fray regarding bailouts, questioning the legality of the current ECB bond buying program, following in the footsteps of the Bundesbank, while splits in the German cabinet about gold collateral continue to rumble on.
In France the French PM announced a new €11bn deficit cutting package as well as cutting the growth forecasts for the French economy from 2% to 1.75% for 2011.
The new budget includes a range of tax rises on income and consumption as France tries to convince the markets it deserves to keep its triple “A” credit rating.
Later this morning sterling watchers could find out why MPC member Martin Weale changed his vote at this month’s meeting of the MPC after reversing his call for a rise in rates, as he prepares to give a speech.
US weekly jobless aren’t likely to offer much comfort despite yesterday’s surprise rise in durable goods orders, as they continue to struggle to drop much below the psychologically important 400k mark. Expectations are for a slight decrease from 408k to 405k.
After Tuesday’s key reversal day, gold continued its plunge yesterday, dropping over $150 in two days. At close of business CME then announced a further margin hike of 27% begging the question, did someone know before yesterday’s announcement was made?
EURUSD – struggling to find anything new to say here – the single currency continues to find itself capped just above the 1.4500 area and last week’s highs.
The major support lies around the 1.4030 area where the 200 week moving average sits. There is also major resistance remaining between July’s peaks between 1.4535 and 1.4575/80. To open up a move towards the 1.4030 area the euro needs to push back and close below the 55 day MA at 1.4330, which has acted as support for the last four days.
There is also minor trend line support from the 1.3835 lows currently around the 1.4220 level.
GBPUSD – yesterday we saw a break below the 1.6420 area that had held as support for most of this week. This break now opens up a move to trend line support at 1.6270 from the July lows at 1.5780.
The 1.6250/60 area remains the broader solid support and only a concerted break below 1.6220 retargets 1.6170 while the 200 day MA remains the key support at 1.6100/10, and a sustained break below could well target further losses.
Pullbacks should find resistance around 1.6430 and 1.6520.
EURGBP – the single currency continues to find support above the 200 day MA around the 0.8660/70 area and we have once again returned towards the top end of the recent range near the 55 day MA at 0.8835. It needs a daily close above this level to target higher levels, and a move towards 0.8900.
A close below the 200 day MA has the potential to retarget the May lows at 0.8610 and ultimately the trend line support at 0.8545 from the 2010 lows at 0.8065.
USDJPY – a slight rebound in US bond yields has kept a floor under the yen around the 76.00 lows seen last week.
The risk remains for further losses, but the market needs to take out the base that appears to be building up around the major lows around the 76.00 area, and at the moment this doesn’t look likely.
Any move below these key lows could well see further US dollar losses towards 74.50.
It really needs to rally beyond the 77.30 area to kick on towards the 55 day MA and bigger resistance level at 79.50/60.
Equity market calls
FTSE100 is expected to open 14 points higher at 5,220
DAX is expected to open 5 points higher at 5,686
FTSEMib is expected to open 25 points lower at 14,956
Today’s FX commentary provided by Michael Hewson, Market Analyst at CMC Markets