Over the past few years whenever a central bank has signalled an easing of monetary policy markets have reacted positively in the belief that the respective actions of said banks would keep the risk trade going, as well as help stimulate the growth needed to help keep the economic recovery on track. This approach now appears to be suffering from the law of diminishing returns as the placebo effect begins to have less and less effect. Following on the heels of last week’s interventions from the Bank of England, European Central Bank and People’s Bank of China, we’ve seen Brazil and South Korea cut rates and the market has kept on falling as investors fret that the central banks have run out of bullets. This mornings Chinese economic data certainly helped explain last week’s intervention by the People’s Bank of China. Chinese GDP slipped below the 8% level to come in at 7.6%, a 3 year low and below consensus expectation of 7.7%, while industrial production for June also missed coming in at 9.5%, below expectations of 9.8%. Retail sales for June on the other hand came in as expected around the 13.5% level One thing that has also changed quite quickly has been the amount of money on overnight deposit at the ECB, after the bank cut rates to zero last week. If policymakers were hoping the money would find its way into the real economy they are likely to be disappointed if the move in government bond markets yesterday is any guide. Yields on Danish, Swiss, French, Finnish and Dutch short term government debt went into negative territory yesterday, as money poured into these assets, coincidence or not? Furthermore the euro slid sharply across the board against a whole host of currencies, including the yen, as it lost its yield differential attractions. Concerns about economic growth continue to worry as Greek unemployment hit another record high at 22.5% and remains on an upward trajectory, while concerns about deepening recessions in Italy and Spain has seen the bond yields there start to edge higher again after two days of sharp declines. The head of the country’s business lobby Confindustria said that the Italian economy will probably shrink by 2.4% this year as a best case scenario, further spooking markets worried about how the Italian government will deal with its debt load of nearly €2trn. This is likely to be the reason why Moody’s downgraded Italy’s government bond rating by two notches and earned it could well cut by more if the country were to lose access to the debt markets. Today’s 10 year Italian bond auction will be a key test, and though yields are likely to be lower than the last time when they came in at 6.19%, the bid to cover will be of particular interest given the last one was on the low side at 1.3, and since then the Italian PM Mario Monti has indicated that he will not be standing for re-election, when elections come round next year. This could affect investor appetite given the duration of the paper. EURUSD – the triangle breakout seen at the beginning of this month still points to a move towards 1.1880 and the 2010 lows. Any pullbacks should find resistance at the 1.2290 level, and previous June lows. The risk of a bigger short squeeze remains on a break back through 1.2300, which could see a move towards 1.2370. A daily close back inside the triangle breakout retargets the highs last week and 55 day MA at 1.2680, while behind that the 50% retracement level of the 1.3285/1.2290 down move at 1.2790. GBPUSD – a death cross MA crossover on the daily charts signals an increase in downside pressure. The move below 1.5460 now targets a potential move towards the June lows at 1.5270. The 1.5460/70 level should now act as resistance; however a rebound could pull back as far as this weeks high at 1.5580. A move below 1.5250 signals a risk of a return to the July 2010 lows at 1.4950. Only a close beyond 1.5750 the 200 day MA could target 1.5910, which would be the 61.8% retracement of the 1.6305/1.5270 down move. EURGBP – downside pressure predominates here while below the 0.8000 level, though we also have resistance around the 0.7920 area. While below 0.8000 the momentum remains for the move towards the 0.7784 level, which is 61.8% retracement of the entire up move from 0.6535 and 2007 lows to the 2008 highs at 0.9805. The major resistance remains around the 55 day MA and trend line resistance from the highs this year at 0.8505 at 0.8040. USDJPY – the US dollar continues to remain stuck within a range between the 79 and 80 levels. The key support remains at the 200 day MA at 79.00 and needs to hold above this level to argue for a move through 80.40. A move below 79.00 targets 78.20. The main resistance remains at the top of the cloud at 80.45 while we need a weekly close above 80.50 to reassure about further upside.

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