Despite the political wrangling taking place in the US at the moment it is the UK that will take centre stage this morning with the release of preliminary Q2 GDP numbers.
Some economists fear that the figures could show that the economy has slipped back into contraction territory. Expectations are for a rise of 0.2%, down from Q1’s 0.5% rise, due to concerns that the UK consumer is starting to struggle against the competing demands of paying the bills, rising prices, and the discretionary spending which is required to boost the UK economy.
The fact is given the parlous state of UK household finances, and the fact that the UK economy is 70% consumer driven, low GDP growth is likely to be the new normal for some time to come, until the household debt of the consumer is pared down to more manageable levels.
A poor number will also increase the political pressure on the UK Chancellor to loosen his current spending plans, with all the inherent risks that would bring in the bond markets to the current low borrowing costs. It will also increase the likelihood that interest rates will continue to remain low for some time to come, as well as increase calls for further QE.
With the current focus the market has on debt the stakes could not be higher given the calls from some parts of the political debate for a plan B, or a relaxation of the fiscal reins, in order to help boost growth.
In the US the political wrangling over the raising of the debt ceiling has continued in the last 24 hours with both parties putting forward competing plans to raise the debt ceiling, as well as continuing the political blame game.
The US dollar plunged in Asia after President Obama announced that the parties were as far away as ever on a deal as markets woke up to the fact that the US could well be sleepwalking its way into a default.
Republican Boehner’s two step proposes a short term rise in the ceiling matched by spending cuts over a ten year period, tied to a plan to cut spending further down the line. This plan would involve another debate early next year for a further rise to the debt ceiling.
On the other side of the political divide Senate leader Democrat Harry Reid proposes a much longer term fiscal plan to cut $2.7 trillion in spending over the next 10 years in order to give President Obama the additional borrowing authority he seeks, enough to get through the 2012 elections.
Today’s US consumer confidence figures for July will be a key barometer of how much damage has been done by the recent uncertainty caused by this political wrangling, with expectations of a fall back to 56, from the previous 58.5.
In amongst all this uncertainty the Swiss franc and gold have continued to hit record highs against the US dollar as investor’s hedge against the probability of a credit rating downgrade in the coming months as well as a possible default.
EURUSD – the risk for further gains in the single currency towards the July high at 1.4576 remain while above the 55 day and 100 day MA around the 1.4300/10 area. The move in Asia beyond trend line resistance at 1.4450/60, brings the 1.4500 level into play.
The euro should find support around the 55 day and 100 day MA both at 1.4305/10. Only a move back and close below 1.4300 would reopen a test of the downside, back towards 1.4150.
GBPUSD – the pound continues to hold above the 1.6260 area which was the 50% retracement of the down move from the highs at 1.6745 to the recent 1.5780 lows.
Momentum should continue to remain positive while above here for a move towards 1.6380, which is the 61.8% retracement of the same move. A move above 1.6380 targets 1.6520.
If the pound slips below 1.6250/60 then we could well get a move back towards 1.6180/1.6200 which acted as strong resistance for most of last week. Only move below 1.6180 retargets the 1.6080 pivot.
EURGBP – the break in Asia above the highs at 0.8850 now looks set to target a move towards the 0.8895 initially level initially, 50% retracement level, and then the 0.8940 area, which is the 61.8% retracement of the down move from 0.9085 to the 0.8705 lows this week. Intraday trend line support from the 0.8705 lows last week can be found around 0.8820 level.
USDJPY – while below the main resistance at the May lows of 79.50/60 the bias remains for further declines.
Yet another new low at 77.92 keeps the bias firmly to the downside after breaking below the lows earlier this month at 78.50. The all time lows below 76.50 remain a key target, however with the threat of intervention hanging over the market; it could well be susceptible to sharp short squeezes.