By Michael Hewson (Senior Market Analyst at CMC Markets UK)
After the late Draghi induced rally of last week, attention this week turns to a number of key central bank meetings in what could well be a key week for not only Europe but the global economy as a whole. We have meetings of the Federal Reserve, Bank of England and the European Central Bank.
It is likely to be the ECB meeting that merits the most attention.
Affirmations of support for the euro from Italy’s Mario Monti and German Chancellor Angela Merkel at the weekend, that they will do everything possible to protect the euro zone, echoed similar comments from French PM Francois Hollande on Friday in a similar conversation with Mrs Merkel. They went on to say that the agreement reached in June should be implemented in full by all parties.
The rebound in markets has been fuelled by an expectation that we could well see the ECB embark on some radical new policy action to stem the flow of contagion risk in Europe and lower Spanish and Italian borrowing costs. This feeling was reinforced by reports from French Daily Le Monde that co-ordinated action is being planned by the ECB and bailout funds to buy bonds directly on the open market.
This optimism has also been reinforced by a number of meetings due to take place this week with US Treasury Secretary Timothy Geithner scheduled to meet German finance minister Schaeuble, before heading off to meet ECB President Draghi in Frankfurt.
Not surprisingly Draghi’s comments last week have run into opposition from the German Bundesbank who remain opposed to any form of monetary financing for governments and with the ECB rate meeting later this week Draghi’s meeting with Jens Weidmann will be key, given that the Bundesbank as the ECB’s biggest shareholder, any opposition to what Mr Draghi has in mind could be problematic.
Spanish bond yields have dropped as a result of last week’s verbal intervention, but they still remain uncomfortably high and there is a risk that having raised expectations so much any disappointment is likely to provoke a sharp turnaround.
As if to emphasise the stakes the release this morning of the latest Spanish GDP numbers for Q2 are expected to show that the Spanish economy remains mired in recession with a contraction of -0.4%. On Friday we saw the latest unemployment figures show a rise to 24.6%, another record high.
More austerity cuts in Greece are still being negotiated as the country strives to remain in the Eurozone, with speculation rising that another debt restructuring is on the cards. This time potential losses could well be imposed on the official sector, in an attempt to keep the indebted country in the Eurozone, in an attempt to help aid the release of the next tranche of official funding.
The recent drop in bond yields should help the Italian government this morning in getting away auctions of three, five and ten year debt today, with the last 10 year auction seeing a yield of 5.82% and a bid to cover of 1.7.
Also, later this week we have the FOMC meeting where speculation is once again rising of some form of indication by the Fed about further stimulus after Friday’s weaker GDP number for Q2. The most likely course of action is likely to be an extension of the low rate guidance into 2015.
The Bank of England is likely to leave its policy unchanged this week, despite last week’s dire Q2 GDP number.
Chancellor George Osborne did receive some welcome good news, during the Olympic opening ceremony when ratings agency S&P resisted the temptation to spoil the Olympic party and joined in with the Olympic feel good factor by affirming the UK’s triple “A” rating with a stable outlook, citing the UK’s monetary flexibility. Maybe we should hold the Olympics more often?
EURUSD – a bullish weekly candle on the euro last week suggests we could well be in for a short squeeze back towards1.2600 in the medium term. To convince though we would need to see a breach of the 55 day MA at 1.2474.
Pullbacks from Friday’s high at 1.2390 are likely to find support around the 1.2230 level, and below that at 1.2150.
A monthly close below 1.2150 is likely to be the catalyst for a move lower though we should also be aware that the 200 month MA comes in at 1.2060, near this weeks low.
GBPUSD – Friday’s rally has once again been unable to push above the 200 day MA at 1.5747, though it did come close to it.
This region also coincides with June and July highs so is important resistance in order to prevent a break towards 1.5910. Pullbacks look likely to find support around the 1.5640 level.
There is also trend line support at 1.5440 from the 1.5270 lows and this could conceivably hold any further downside pressure.
Only a close below 1.5240 signals a risk of a return to the July 2010 lows at 1.4950.
EURGBP – last week saw a rare positive week for the euro which could augur well for some short term stability. It does need to stay above last week’s low at 0.7755 though. The resistance at 0.7880 held on Friday and this needs to give way to suggest further gains towards the 55 day MA and the 0.8000 level.
A break below the October 2008 lows at 0.7695 could well see a test of the 2008 lows at 0.7390.
USDJPY – the US dollar continues to find support below the 78.00 level, with cloud support and the May lows 77.60 remaining a key level. As long as this holds the downside, the risk of a rebound remains quite high.
A move above the 79.30 level brings the 80.00 level back into play and then by definition the main resistance at the top of the weekly cloud at 80.45.
Equity market calls
FTSE100 is expected to open 25 points higher at 5,652
DAX is expected to open 68 points higher at 6,757
CAC40 is expected to open 27 points higher at 3,307
FTSEMib is expected to open 141 points higher at 13,738