For the past few weeks the markets focus has been predominantly on Europe and the sovereign debt crisis, despite the problems in the US and the talks on the debt ceiling and fears of a possible default. Friday’s disappointing non farm payrolls figures changed that when they came in short of expectations by over 100k and fuelled further worries about the sustainability of US economic recovery.
With QE2 ended, the talk now is of the possibility of further QE, however given the political environment in the US at the moment, this doesn’t seem likely to happen in the short term, though tomorrows FOMC minutes may give further clues to Fed thinking on that.
Markets will therefore be focussing on the start of US earnings season today, starting with Alcoa after market close tonight, for some form of boost to sentiment in the wake of Friday’s disappointment.
In Europe there appears to be some shifting of positions among European leaders with respect to the crippling debt burden currently weighing on Greece with consideration being given to a partial default in an attempt to bring the level of Greek debts to a more sustainable level. Today’s finance ministers meeting in Brussels is said to be discussing the preliminary groundwork for new proposals along these lines. This however is becoming somewhat of a side issue with increasing concerns about Italy’s problems with rising borrowing costs and political infighting weighing on the markets ahead of the results of this weeks stress test results. EU leaders will also be discussing ways to try and assuage market concerns about Italian finances in the knowledge that the EFSF doesn’t have the firepower to deal with a contagion spreading to Spain or Italy. In signs of increasing stress in Italian financial markets the regulator has insisted that short sellers disclose their positions in an attempt to bring transparency to the markets.
The pound has rebounded from 15 month lows on the back of the troubles in Europe, however the UK’s own fiscal position isn’t that great with prices continuing to rise after factory gate prices released on Friday remaining elevated and tomorrow’s inflation data unlikely to provide any respite.
EURUSD – Friday’s failure to get back above the 55 day MA at 1.4410 keeps the odds favouring a test of the bottom end of the recent range for the single currency.
The onus remains on the trend line support at 1.4165/75 from the May lows at 1.3970. A break below the trend line support would look to target the 200 week MA at 1.4025. In another negative signal Friday also saw the single currency close marginally below its 100 day MA for the first time since February
To stabilise the downside pressure the single currency now needs to close back above the 55 day average in the 1.4410/20 area, which would then re-target the 1.4500 area.
GBPUSD – the messy consolidation of the past weeks continues to constrain the price action with once again support in the mid 1.5940/50 propping the pound up. Interim resistance around the 200 day MA at 1.6048 is acting as a cap in the near term, despite Friday’s brief pop above it.
While below the larger resistance at 1.6120/30 we still look for a test of the 1.5880 area which is the 61.8% retracement of the 1.5340/1.6745 up move. Below 1.5880 could well then target 1.5750.
A break of 1.6120/30 could well see further gains towards 1.6200.
EURGBP – the failure on Friday to break back beyond the 0.9010 area precipitated another drop back through 0.8940 and the subsequent down move saw the single currency fall towards the trend line support at the 0.8850/60 area, from the May lows at 0.8605. A break below this key support area at 0.8850 could well see a move towards 0.8785.
In the process the weekly candle chart posted a bearish weekly reversal and this could well suggest further euro weakness in the near term.
Rebounds should find resistance around the 0.8940 area and behind that at 0.9010.
USDJPY – another unsustainable spill over to 81.47 on Friday once again didn’t presage the sharp move higher hoped for. This was largely due to 10 US bond yields dropping sharply back towards the 3% area.
The current pullbacks should find support around trend line support at 80.40 from the June lows at 79.70.
For now the 80.00 level remains fairly solid support while a slide below 79.80 could well see a re-test of the May lows at 79.50.