FX Commentary from Michael Hewson

Last night saw broad agreement amongst EU nations of the fiscal treaty so favoured by Germany; however the agreement was not universal, with the UK and the Czech Republic refusing to sign up. The treaty is expected to legally bind EU countries to balance their budgets over time; however it is not clear whether some local parliaments might require a referendum on the issue, with Ireland a likely candidate.

It is also not clear how legally enforceable the pact will be and how much latitude states will have with respect to “exceptional circumstances” in deviating from the agreement.

In any event this is a mere side issue with the continued lack of agreement with respect to a Greek debt deal. With a new Greek aid package contingent on the current negotiations surrounding the debt restructuring, any agreement was always likely to be tortuous, especially given the fact that Greece’s finances are in an even worse state than originally thought, with a funding gap that needs filling.

It therefore looks like the markets will have to wait a little while longer for any news on the PSI, given that the troika are still in Athens, and as with all things Europe it is better to treat anything EU politicians say with a large dollop of scepticism, with respect to timeframes.

Unfortunately for EU leaders, for all the talk of Greece being a special case it appears that Portugal could well be going the same way, as its bond yield continue to explode higher, with 10 year yields above 17%, and it seems likely that a debt restructuring could well be on the cards here as well, given that the economy is contracting sharply.

In addition to all of that and for all the fine talk of budget responsibility and fiscal compacts, one of the biggest problems in Europe remains unemployment, with youth unemployment exploding in Spain, above 50%, in Greece, 46.6% and Portugal, over 30%.

Today’s Eurozone unemployment figures are therefore not expected to make pretty reading though the worst of it is expected to be disguised by Germany’s record low unemployment rate.

German unemployment for January is expected to drop by 5k, while the unemployment rate is expected to stay at a historically low 6.8%.

Italian unemployment for December, on the other hand is expected to increase from 8.6% to 8.7% while European unemployment is expected to rise to 10.4%.

Over the other side of the Atlantic an air of cautious optimism remains despite last week’s disappointing Q4 GDP number, and the Fed’s downbeat assessment of the US economy.

US consumer confidence for January is expected to improve from 64.5 in December to 68, while the Chicago Purchasing Manager index is expected to rise from 62.2 in December to 63.0.

EURUSD – yesterday’s failure to breach the 1.3245/50 38.2% retracement of the down move from the October highs at 1.4250 to the recent lows at 1.2610., keeps the focus on the downside.  A break though could well target a deeper move towards 1.3450; however a potential bearish reversal on the candle charts keeps the focus for a move lower.

To reopen a downside move we still need to see a break below 1.3060 to retarget last Wednesday’s lows at 1.2940/50 level which prompted the sharp rebound at the end of last week.

The key support level remains around the 1.2850/60 area and only below this level reopens a move towards the key 1.2600 level which represents the 76.4% retracement of the up move from the 2010 lows at 1.1880 to last years highs at 1.4940. This support level also coincides with the August 2010 lows at 1.2590.

GBPUSD – yesterday saw the pound post its first negative day in the past 11 and in the process post a possible potential reversal, after failing at 1.5740. While below the December highs at 1.5770/80, the bias remains towards the downside and the longer term downtrend intact. Only a move above 1.5780 targets a move towards 1.5920 and slightly above that the 200 day MA 1.5968.

The 1.5550 area looks like to continue to act as support on any move back lower, which if broken, could see a move back to 1.5360.

EURGBP – the single currency continues to run into a wall around the 0.8420 cap.

While 0.8420 caps the focus remains for further euro losses back towards the September 2010 lows at 0.8200/05, which remain the key obstacle to further declines towards the 2010 lows at 0.8065. There is also trend line support at 0.8320 from the 0.8220 lows.

A break of 0.8420 could well trigger a sharp move towards 0.8500.

USDJPY – yesterday’s move below the 76.50 level opens up the risk of a move back towards the all time lows at 75.30.

This move could now open the risk of possible further intervention by the Bank of Japan as the yen continues to rise.

The 200 day MA at 78.30 remains the key barrier to a US dollar turnaround after last week’s failure at that level

Equity market calls

FTSE100 is expected to open 23 points higher at 5,694

DAX is expected to open 35 points higher at 6,479

CAC40 is expected to open 21 points higher at 3,287

FTSEMib is expected to open 81 points higher at 15,834

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