Despite the well documented vulnerability of the UK economy to the problems in Europe the pound continues to push higher, near to 10 month highs and eight successive up days in a row against a basket of currencies.
Yesterday’s Bank of England minutes showed that the MPC remain reluctant to pre-commit to further easing in the near term, and the latest public finance figures seem to suggest that the Chancellor is on track to meet his spending targets for this year.
Today’s publication of the final Q3 GDP numbers are expected to confirm growth of 0.5% so shouldn’t provide too many surprises.
Total business investment is also expected to remain under pressure, unchanged at -1.4%.
The real concern remains with existing business investment and yesterday’s minutes seemed to indicate that output was broadly flat in Q4, suggesting that the last quarter of 2011 could well show no growth at all, and possibly negative growth at worst.
Yesterday’s version of QE by the back door by the ECB saw the single currency gain initially before the realisation set in that the high take-up of 523 banks suggested that the European Banking system had been on the verge of a financial aneurism as banks struggle to raise funds. While it may buy vulnerable banks some time, it is certainly no solution to the wider problem of slow or no growth. Furthermore the failure to deal with the failing banks also puts the good banks under pressure, as there is no discernible way to distinguish them.
A point reinforced by yesterday’s Italian Q3 GDP numbers which showed Q3 GDP slip 0.2%.
Today sees the release of Italian retail sales for October with expectations of a decline of 0.2%, while markets await the outcome of a key confidence vote for new PM Mario Monti in the Italian Senate on the latest austerity budget.
Italian and Spanish bond yields also continued to rise despite the free money suggesting that the banks were resisting the temptation to implement the bond carry trade that the cheap finance presented it with.
In further evidence of the tribulations in Europe Hungary found itself on the end of another downgrade by Standard and Poor’s, while the Greek PSI talks are on the verge of collapse as hedge fund Vega threatens to sue Greece for excessive haircut.
In the US it is also final Q3 GDP day and no change is expected to the previous figure of 2%, with all measures set to remain unchanged.
Weekly jobless claims are set jump back after last weeks surprise fall to 366k, with expectations of a figure of 378k.
The main number is the final University of Michigan confidence number which is expected to increase from 67.7 to 68.00.
EURUSD – the single currency managed to break sharply higher above 1.3150, touching the 1.3200 level before dropping sharply back. The November lows at 1.3210/20 proved to be a rather difficult obstacle to overcome.The failure to close above the 1.3150 level does keep the risk for further losses, but a break above 1.3220 could well signal a move to 1.3400.
The January lows at 1.2870 remain the main barrier to a move towards the August 2010 lows at 1.2590.
Given the sharpness of recent moves we could well continue to see choppy range trading unfold now between the recent lows at 1.2950 and the 1.3150 and even possibly 1.3220 levels.
GBPUSD – the pound did what it did best squeezing back to the recent range highs at 1.5780 yesterday, however it was once again unable to close beyond the 55 day MA at 1.5755. As such the downward momentum remains intact. Only beyond 1.5780 targets 1.5900.
The old resistance around 1.5580 now becomes support.
The longer term support from the 2010 lows at 1.4230 remains the key level and now comes in at 1.5425. A move below 1.5400 retargets the 1.5270 lows in October, and then 1.5190 61.8% retracement of the 1.4230/1.6745 up move.
EURGBP – yesterday’s low at 0.8308 saw the single currency almost reach its January lows at 0.8285. The move yesterday did equal a 76.4% retracement of the entire up move from 0.8065 to 0.9085. A break below 0.8285 targets 0.8200.
Pullbacks should find resistance around yesterday’s highs at 0.8370/80.
The key resistance remains around the highs this week at 0.8425, and only a move beyond here would target a move back towards 0.8450 and even the 200 week MA at 0.8567.
USDJPY – no real change here except the US dollar seems to forming a triangular consolidation with support at 77.45 and resistance at 78.10. The 55 day MA remains the key support at 77.30 as we look to see a move higher towards the trend line resistance at 78.40 from the 2007 highs at 124.15. The 200 day MA at 79.10 is the key long term resistance.
Only below the 55 day MA would undermine this scenario, and risk a move lower that would see the next key support area around the 76.20/30 area, a break below of which opens up the lows at 75.30.