The positive market reaction seen towards the back end of last week to the latest earnings announcements from Facebook and Apple proved to be fleetingly short-lived, giving way quite quickly to renewed concerns of an escalation of tension in Ukraine.
Having spent the most part of last week at the back of investor’s minds concerns about the situation in Ukraine have once again returned to front of mind after pro-Russian separatist forces raised the stakes by holding hostage a number of European military observers on claims that they were NATO spies.
These claims drew an angry reaction from G7 officials who have accused Russia of covertly influencing the increase in tension in contravention of the recent Geneva agreement, with both sides accusing the other of acting in bad faith.
Further targeted sanctions look set to be announced today by G7 leaders in response to these recent events, and investors will be hoping that there is no further deterioration in what is increasingly turning into a volatile and fluid situation.
Away from events in the Ukraine, financial markets will also be looking at a number of extremely important economic announcements from the UK, US and Europe with growth and unemployment data set to present quite a mixed picture this week, while the latest Federal Reserve FOMC meeting looks set to agree another reduction in the central bank’s stimulus program of $10bn to $45bn a month, ahead of Friday’s US payrolls report, which is expected to see unemployment drop to 6.6%.
It is expected to be a big week for the UK economy with the first iteration of Q1 GDP in the wake of the recent upgrade to Q1 growth forecasts by the Bank of England last week, with some expectations for growth of 1% in the first quarter, in spite of the very wet winter, and a decline in overall retail sales numbers for the first quarter.
We will also get initial indications of the sort of start growth in Q2 has got off to with April manufacturing and construction PMI data.
Just prior to the latest Fed decision on Wednesday we are expected to see the latest US Q1 GDP numbers with estimates of an increase in economic growth to 1.4%, from 1% in Q4, while the latest ADP payrolls report for April is expected to show jobs growth of 200k.
In Europe this week the picture is expected to be much more mixed with good data expected to be more geared towards Germany with unemployment data expected to remain low, at 6.7% in April, while Spanish, Italian and EU unemployment data for March is expected to remain at elevated levels of 25.6%, 13% and 11.9% respectively.
Any expectation that we might see easing from the ECB next week are likely to be disappointed given that the latest GDP numbers from Spain are expected to show improved growth for Q1 to 0.4%, from 0.2%, while deflationary pressures are expected to subside in the latest German CPI numbers for April which is expected to rise sharply from 0.9% to 1.3%, and EU inflation data is expected to jump back to the 1% level from 0.7%.
EURUSD – the euro has traded in an 80 point range over the past two weeks, lacking any conviction in either direction, remaining well short of the recent highs at 1.3970. As such we continue to look as if we could well start to drift lower, but for now we appear to be finding support at 1.3780. There is also long term trend line support from the lows last year coming in at 1.3765. A break below the April lows at 1.3675 could well see a move towards 1.3500.
GBPUSD – last week saw a range of 75 points with 1.6845 continuing to act as a temporary cap. The move higher continues to lack conviction, meaning that we continue to have some resistance here. As such this level continues to remain important with respect to further progress. We need a move above 1.6880 to put the pound above its November 2009 highs. While below here the risk of a pullback towards 1.6555 remains a possibility, on a break below 1.6670.
EURGBP – the reaction off last week’s lows at 0.8197 has been limited and needs to overcome 0.8250 to suggest a retest of the 0.8300 area, where there is strong resistance. While below the 0.8250 level the risk remains for a move towards the lows this year at 0.8158.
The resistance at the 200 day MA at 0.8385 remains a key obstacle to further gains.
USDJPY – the US dollar appears to be finding resistance at the 102.80 level and we need to see a move back through the 102.80 level to suggest a move back to the highs at the beginning of the month at 104.10. We have solid support at the 101.20 area and the March low. A move through 101.20 opens up the 200 day MA at 100.90, a break of which could well see a move towards 98.60.
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