The pound has taken a bit of a pummelling in the past five days, against a basket of currencies but especially against the euro. Given the problems coming out of Europe this week, it’s a little difficult to understand why.
Even so, it wasn’t helped yesterday by disappointing economic data, starting with weaker consumer confidence figures for July, which dropped to a 3 month low. Yesterday’s CBI retail sales data for August confirmed the fears that the August riots did indeed hit trade, and saw the index fall to -14 to its lowest level since May 2010. With MPC member Martin Weale refusing to rule out further asset purchases to support an ailing economy the pound hit its lowest levels for two weeks.
It is hoped that today’s UK Q2 GDP revision will arrest the decline with expectations that Q2 growth will remain unchanged at 0.2%, though there is a small chance it could well be revised upwards. In any case the growth still remains better than France and Germany’s combined for Q2.
Later on just before the US open it is the US’s turn for their Q2 GDP revision and here the story doesn’t look as healthy. Constant downward revisions of growth forecasts in the past weeks have seen expectations lowered here, and the expectation is that the preliminary Q2 GDP print of 1.3% earlier this month could well be downgraded to 1.1%.
Soon after that Michigan confidence final figure for August is published and the hope is that the shocking drop to 54.9 we saw earlier this month will be revised up slightly to 56. It would be a small victory if it was, but only that, while soon after Fed Chairman Ben Bernanke steps up to make his annual speech at Jackson Hole, which is what markets have been focussing in on all this week.
This is where last year he fired the starting gun for the eventual lead-up to QE2 in November.
It is extremely unlikely he will do anything similar this year and if markets think that he will, they could be in for a big disappointment.
To start with inflation is much higher, which makes it much more problematic, not withstanding the different political climate that the US is now operating in with the Tea Party movement.
There is also the small matter of the three dissenters on the FOMC, compared to only one last year. He can’t just ignore them and he would be foolish to do so. He also needs to be cognisant of any fallout from the Japanese and the Swiss as well as emerging market nations who are currently battling a high currency and/or high inflation from high commodity prices.
Their reaction to any perceived deliberate US dollar depreciation that any new QE measures would bring isn’t likely to be too positive, and could provoke a backlash.
EURUSD – price action is still compressing but the highs are getting lower with 1.4500 continuing to cap.
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 1.4230 level.
The major support lies around the 1.4030 area where the 200 week moving average sits.
GBPUSD – as suggested yesterday the break of 1.6420 area did indeed open 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 – yesterday’s push higher continues to struggle around the 55 day MA above 0.8830 and the top of the recent range. It needs a daily close above this level to target higher levels, and a move towards 0.8900.
To diminish the risk of a break higher we need to say the single currency push back below the 0.8800 level to open up 0.8750 again.
The major support remains at the 200 day MA around the 0.8660/70 area. Only 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 – yesterday’s break above the recent highs around 77.20 has seen the US dollar break up towards the 78.00 level.
The market appears to have built up a pretty solid base around the major lows around the 76.00 area, and while this holds we could well see further gains.
Any move below these key lows could well see further US dollar losses towards 74.50.
Now that the 77.20 level has been taken out the odds have shifted towards a test of the 55 day MA and bigger resistance level at 79.50/60.
Equity market calls
FTSE100 is expected to open 1 point higher at 5,132
DAX is expected to open 34 points lower at 5,550
FTSEMib is expected to open 60 points lower at 14,885
Today’s FX commentary provided by Michael Hewson, Market Analyst at CMC Markets