Despite the initial disappointment of no QE3 announcement at Jackson Hole last week, markets took encouragement from Bernanke’s announcement that he would extend next month’s FOMC meeting to two days to fully explore and discuss any range of options for, and against further stimulus.
It seems that markets have taken this to mean that we could well see further stimulus, despite the significant barriers against it, both political and fiscal.
The market also took in its stride IMF chief Christine Lagarde’s warning that European banks needed urgent recapitalisation, and that the crisis was entering a dangerous new phase. This call was firmly rebuffed by EU officials with EU commissioner Olli Rehn insisting that the health of EU banks had improved over the past year.
To look at yesterday’s price action markets seem to concur, after news that two Greek banks, EFG Euro Bank and Alpha Bank merged and saw Greek stock markets rise by the most in 20 years.
The single currency continues to remain resilient without racing away, as doubts remain about the new Greek bailout with Finland remaining steadfast in its insistence on collateral as security for any new loans.
Even comments by Trichet yesterday that the ECB is reviewing the risks to price stability, failed to dent the single currency, which is somewhat surprising given that reading between the lines, suggests that any further rate rises could well be off the table in the near future, and could well see the next move in rates as lower.
In Italy it would appear that the latest austerity budget could well get watered down which could well bring further pressure to bear on Italian bond yields at today’s auction of 3, 7 and 10 year securities.
Later on today the minutes of this months FOMC meeting could well give an indication of the hurdles faced by Bernanke and further QE in the face of the three dissenters on the committee at next months two day meeting.
Before that though US consumer confidence for August is expected to decline further from 59.5 to a reading of 52.
EURUSD – the single currency continues to remain resilient to downside against the US dollar but has, as yet, failed to get above the major resistance remaining between July’s peaks between 1.4535 and 1.4575/80. Above here re-targets the 1.4700 level.
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 1.4260 level.
The major support lies around the 1.4030 area where the 200 week moving average sits.
GBPUSD – Friday’s failure to break below the 1.6220 area and 55 day MA once again caught the bears out and provoked a sharp pull back, as the cable remains stuck in its broad range.
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 continue to find resistance between 1.6450 and 1.6520.
EURGBP – the push above the 55 day MA did indeed provoke a move higher, however the single currency was unable to take out the August highs at 0.8885 and until it does so the recent range continues to hold sway.
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 – the market continues to look as if it is building 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.
Though last weeks move above 77.20 wasn’t sustained it doesn’t mean the market won’t have another crack at it. If we take out 77.60 then the odds will have shifted further towards a test of the 55 day MA and bigger resistance level at 79.50/60.
Equity market calls
FTSE100 is expected to open 145 points higher at 5,275
DAX is expected to open 35 points higher at 5,705
FTSEMib is expected to open 115 points higher at 15,256
Today’s FX commentary provided by Michael Hewson, Market Analyst at CMC Markets