As suspected ratings agency Standard and Poor’s followed up its downgrades of EU nations last Friday, with a downgrade of the bailout fund late yesterday evening, downgrading the long term rating for the EFSF fund to AA+ in line with its announcement caveats from 6th December.
Given the recent success of a three year EFSF auction earlier this month today’s first six month T-bill auction of €1.5bn will be closely monitored, though it shouldn’t encounter too many problems given that its short term rating remains intact.
Even so if European leaders were harbouring any faint hopes of implementing plans to leverage up the EFSF, these have now pretty much gone up in smoke, with EU policymakers resorting to name calling, and focussing on bringing forward the (ESM) European Stability Mechanism, as soon as possible.
The immediate concern remains Greece and the recently stalled debt talks, with fears about an imminent default never too far away.
The latest inflation data in Europe is expected to show that price pressures continue to subside in December with Eurozone CPI forecast to decline from 3% to 2.8%, raising expectations for further ECB rate cuts in the months ahead.
The latest German ZEW data for January is expected to show that business confidence remains fragile with the current situation survey forecast to drop from 26.8 to 24.
Economic sentiment survey is expected to improve slightly but not so much to make a difference, from -53.8 to -49.2.
In the UK the latest inflation numbers for December are due for release with expectations increasing that recent price pressures may well have peaked. Recent news that energy companies will be cutting tariffs next month will have been greeted with some relief inside the Bank of England MPC and combined with last years VAT hike dropping out of the figures in January’s numbers there is a rising expectation that inflation could start to drop quite sharply in t e coming months.
The December CPI figure is expected to drop from 4.8% in November to 4.2%, while retail prices are expected to drop below 5% to 4.7%. A drop of this magnitude could also raise expectations of further QE in February given yesterday’s report by the Centre for Business and Economic Research (CEBR) that the UK could well already be in recession after it slashed its growth forecast for 2012 from +0.7% to -0.4%.
The US markets return from their long weekend with the latest Empire Manufacturing for January, which is expected to improve slightly from December’s 9.53 to 10.50.
Overnight the release of Chinese economic data slightly diminished hopes of significant further easing of monetary policy in the near term by the People’s Bank of China, despite the authorities cutting the bank reserve requirements ratio last month. We could well see another reserve requirements reduction due to concerns about a hard landing, but an interest rate cut seems unlikely.
Chinese Q4 GDP data slipped back from 9.1% on the previous quarter to come in at 8.9%, but still above expectations of 8.7% and showed that despite the problems in Europe economic growth remains fairly robust. This was shown to be especially prevalent in industrial production for December which increased by a much better than expected 12.8%, above last months 12.3%, while retail sales also rose 18.1%, above expectations of 17.3%.
EURUSD – continues to trade within the broader 1.2600/1.2900 range after last week\'s break below the double support at 1.2660/70 latewhich saw the single currency push down near to the key 1.2600 level that represents the 76.4% retracement of the up move from the 2010 lows at 1.1880 to last years highs at 1.4940. This support level also coincides with the August 2010 lows at 1.2590.
A concerted break below this level would target 1.2480, the July 2010 lows and then on to 1.2000.
The key barrier on the upside remains the resistance around the 1.2870/80 or last weeks highs.
If this 1.2870/80 area were to give way we could see an overspill towards the 1.3000 level and even towards the 1.3080 area.
GBPUSD – the pound continues to hold above the 1.5270 October lows, without making too much in the way of headway, either up or down.
Rebounds should find resistance around the 1.5380 area while to stabilise in the medium term would need to get back above the 1.5570 area to retarget the 55 day MA at 1.5740.
The 1.5190 level remains a key support area given that it is 61.8% retracement of the 1.4230/1.6745 up move. There is also support at 1.5125, the July 2010 lows, a break of which targets 1.4980.
EURGBP – the risk of a sharp rally remains a key risk while above the 0.8220 lows from last week, given that the four hour charts look oversold. The 0.8300/10 level should now act as resistance on any rebounds, while the 0.8370/80 should also be a significant barrier.
The September 2010 lows at 0.8200/05 remain the key obstacle to further declines towards the 2010 lows at 0.8065.
USDJPY – maintaining the status quo here with support around the 76.50 area and resistance at a confluence of the 55 day MA at 77.55 and trend line resistance at 77.70 from the 2007 highs at 124.15.
The key support remains around the November 2011 lows at 76.50 which prompted last week’s pullback. Only a move and close below 76.50 opens up the all-time lows at 75.30.