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Bernanke strikes a dovish tone as Europe political turmoil increases
00:00, 11 July 2013
If markets were hoping for any clearer idea about the Fed's future plans with respect to a tapering program from last nights Fed minutes they would have found themselves reaching for the medication, as the minutes seemed to show the committee completely divided on the timing of any pullback. As for me I found myself reaching for the whisky bottle as it became apparent that we are still nowhere none the wiser as to the possible timing of a program. Half of the Fed members appear to support the end of asset purchases by year end, and as for the other half, it would appear that a continuation into 2014 would be warranted. To further cloud the picture the Fed Chairman deviated quite strongly from his previous rather hawkish tone in May by expressing concerns about the resilience of the US labour markets saying that he felt the unemployment rate understated the true level of unemployment, while saying that fears about low inflation suggested that further stimulus was needed. Given the fact that so little appears to have changed since May, and if anything the jobs markets appears to be improving it rather begs the question as to why the Fed Chairman struck such a dovish tone. I think the clue can be found in the level of market interest rates and the move higher in the 10 year bond yield after Fridays jobs numbers. There has been a great deal of concern voiced over the rising level of interest rates in the US mortgage market and it could well be that this concern about a rapid rise in rates and its effects on the still rather fragile US housing markets that has prompted the Fed to jawbone rates lower and smooth the adjustment process. It certainly appears to have had the desired effect with US bond yields sharply lower by about 10 basis points and though US markets closed unchanged the futures are currently pointing to a much higher open. As a result of this newly dovish tone we will see Europe's markets open significantly higher this morning, but how long that will last given the political dysfunction unfolding in Southern Europe is anyone's guess. All across Europe governments continue to come under pressure as they struggle to get their finances under control, against a backdrop of declining growth and rising unemployment, and various scandals. We've seen the Portuguese government splinter and fragment and just about hold together, the question remains for how long these politicians can keep the train on the tracks, with a second bailout looking more and more likely. In Greece it's a similar story where we've seen the troika release the latest bailout tranche, despite the fact that Greece continues to miss its targets amidst growing social unrest and strikes. The Spanish government is embroiled in a corruption scandal which appears to involve PM Rajoy amongst others, and his government is looking increasingly shaky and discredited. The Italian government has seen another ratings downgrade, this time from S&P as the fragile coalition struggles to hold together against continued deteriorating economic data and political disagreements. The key question remains as to whether they will heed the downgrade warning and implement the reforms needed to invigorate the ailing Italian economy, or will they bottle the decision as they have done on numerous occasions before. To borrow a couple of phrases from the theme tune of one of my favourite films the "Italian Job" , European politicians as well as Italian politicians need to "get your skates on mate" and start reforms, and drop the attitude of the "self-preservation society" There could well be one beneficiary from last night's unexpectedly dovish intervention from the Fed Chairman and that could well be peripheral bond yields which have edged higher over the past few weeks on a combination of expectations of Fed tapering and increased political turmoil in the region. Italy is looking to sell about €6.5bn of 3, 5 and 30 year bonds today and we could well see a much lower rate than the ones we closed at last night. The ECB continues to exercise cognitive dissonance over forward guidance being deliberately vague about its duration, slapping down Asmussen's comments on it the other day, while hoping the OMT is never put to the test. With the German elections still over two months away it's hard to be enthusiastic about anything in Europe with the EU determined to prevent any prospect of a blow-up before that date. The problem is, given what's happening in southern Europe, time may not be on their side As far as economic data is concerned we have US weekly jobless claims which are expected to come in at 340k, but given that we had a short week last week this number could miss sharply either way. EURUSD - we appear to have seen a tweezer bottom around the 1.2760 area as well as a bullish daily candle after yesterday's price action. This may suggest that we could be in for a sharp test back towards the top end of the recent range at 1.3230. Only a break below 1.2750 argues for a move towards the 1.2680 level which is 61.8% retracement of the entire up move from 1.2045 lows in July last year to the highs this year at 1.3710. We can also expect to find support at 1.3080, after last night's rally, where the confluence of the 50/100 and 200 day MA's currently sit. GBPUSD - the inability of the pound to break below the 1.4800 area thus far increases the risk of a short squeeze back through towards the 1.5300 area, especially given yesterday's daily bullish candle. Only a break below the 1.4780 level could precipitate further declines towards 1.4230 and the May 2010 lows. There is resistance at 1.5180, a break of which increases the risk of a move towards 1.5300. Pullbacks are likely to find support at 1.5030. EURGBP - yesterday's pullback managed to hold above the 0.8580 area and keeps the higher lows, higher highs scenario intact. We need to make new highs beyond 0.8670 to keep the recent grind higher going towards 0.8730. We need a break below the 0.8580 level to retarget a move back towards the 0.8520 area. USDJPY - the continued inability to push above the top of the Ichimoku cloud now currently at 101.30, appears to be shifting our emphasis and bias towards the downside. Only a close above 101.50 changes the outlook and retargets the highs this year at 103.75 and then 105.80. Last nights move below the 99.20/30 area, which should now act as resistance on any pullbacks, targets a move to the base of the cloud at 98.15. CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.