Friday’s rise in Chinese inflation data to 5.4% prompted the People’s Bank of China over the weekend to again raise its reserve requirements ratio, for the fourth time this year by 50 basis points to 20.5%, and could weigh on commodity currencies this week as Chinese officials become a lot more hawkish in the face of rising costs, and higher than expected GDP growth.
Unsurprisingly the weekend meeting of the G20 didn’t come up with anything more concrete than an agreement to look at a set of guidelines to address economic imbalances, with specific details due to be unveiled later this year in November.
The US didn’t escape criticism either for its huge budget gap with G20 finance ministers saying its policies could undermine global economic recovery.
The weekend outcome of the Finnish elections will give European leaders further headaches this week after the pro-bailout government was ousted, and the euro-sceptic nationalist party was given a major boost. The True Finns party, who don\'t see why Finland should rescue Europe\'s "squanderers," jumped from their previous six seats to win in the region of 40 seats, and pushing the Centre Party led by the Finnish Prime Minister into fourth place.
In the wake of this result Portugal’s bailout could now be in doubt while Greece re-structuring fears are likely to continue to weigh on the topside of the euro.
Further fiscal tightening expectations could well limit the downside though as Eurozone inflation came in higher at 2.7% on Friday. This higher reading prompted further hawkish rhetoric from ECB officials Coene and Nowotny at the weekend, which continues to keep differentials widening, and as such keeps the euro broadly supported on any dips.
The pound appears to be treading water off its recent lows as the euro loses some of its shine, as a result of concern about default risks from peripheral Europe, while Bank of England minutes on Wednesday are expected to retain the status quo and show no change in voting patterns.
EURUSD– the single currency continues range trade between some solid support and resistance just above 1.4520. The key resistance remains around the 2010 highs at the 1.4580 level, and this continues to act as a barrier for a move towards the 1.5000 area.The rising trend line support from the 1.2870 lows of this year now lies around 1.4280, and a break below here could well be the catalysts for an overdue correction towards the 1.4020/30 area.
Only a drop through the 1.4020/30 level can signal a re-test of the 1.3850/60 level.
GBPUSD– the pound continues to remain resilient on dips but like last week it could well continue to struggle anywhere near the 1.6400 level. However while above last weeks lows around 1.6220, and the 55 day MA at 1.6180, the focus remains for further gains towards the 2010 highs at 1.6460, which remains a key barrier, to further gains towards the November 2009 highs around 1.6880.The major support level on the downside of the current range continues to be the February and March lows, around 1.5965.The major trend line support comes in to play around 1.5900 from the lows last year at 1.4230, but we can only expect to see a test of that on a close below 1.5980.
EURGBP– the single currency continues to find support above the channel line support at 0.8810 from the from the 18th February lows at 0.8355, however the lack of any significant rebound suggests that the recent momentum could well be starting to subside.The single currency needs to recover above the 0.8870 level to retarget the recent highs above 0.8900 and re-test the October 2010 highs at 0.8940.A move above 0.8940 targets the 0.9000 area while a break below the 0.8810 trend line could well then open up 0.8710.
USDJPY– last week’s drop below the 200 day MA at 83.45 could well see further US dollar weakness towards the post intervention highs around 82.10 before a rebound.The US dollar needs to recover back above the 83.80 level and Friday’s highs to re-target the trend line resistance from the 124.00 highs now at 85.30 which may well now take a little longer to unfold.Behind this resistance we also have 85.50 which is the 50% retracement level of the down move from the 2010 highs at 95 to the lows at 76.25.This area of resistance remains a large barrier to a rally towards the 87.90 area, which is 61.8% retracement of the same down move.