Yesterday’s confirmation that Spain had become the latest European country to slip into recession was not greeted particularly positively by investors with most European markets finishing down on the day, capping off a negative month for equities in Europe.
With the majority of European markets closed today due to the Labour Day holiday in Europe the focus is likely to be on the massive demonstrations planned across Europe, particular in the southern economies, against austerity, unemployment and labour reforms, which is starting to lead to increasing political tensions across Europe as politicians worry about getting re-elected in the face of discontented electorates.
In the UK following on from last week’s surprise news that Q1 growth contracted, the latest manufacturing PMI data for April is expected to remain in expansionary territory, though it is expected to slip back from the surprise rise to 52.1 in March, slipping back to 51.5.
Last week’s GDP numbers were all the more surprising given the robustness of all sector PMI data seen on this measure since the beginning of the year.
The fact that this data has been so positive helped the pound shrug off last week’s disappointment and has raised expectations that the GDP numbers were being understated and would subsequently get revised higher.
Meanwhile overnight in Australia the RBA wrong footed the markets by cutting interest rates much more than expected, by 50 basis points in response to a weakening economic outlook and slowing growth. Lower than expected inflation numbers last week had made a cut of at least 25 basis points almost certain, however unlike the Bank of Japan the Australian central bank has decided to act decisively in the hope that action now could help smooth out a dip in economic activity in the coming months.
The extent of the cut suggests that the bank is concerned at the pace of a possible slowdown and that, despite an apparent recovery in Chinese manufacturing PMI to its highest levels in over 6 months, policymakers remain concerned about the sustainability in recent economic activity, not only from their biggest export market, but also in the local economy.
In the US, yesterday’s disappointing Chicago PMI and Dallas Fed manufacturing numbers for April has raised concerns that the recent recovery in US manufacturing could already be starting to run out of steam.
Last week’s disappointing Q1 GDP number had already set the tone despite Friday’s rally and markets will be looking towards a number of key data releases this week for reassurance that this recent deterioration is temporary in nature.
Wednesday’s ADP numbers as well as Friday’s non-farm payroll numbers for April are expected to give a key insight into the employment market and whether or not it is starting to slow down significantly.
First of all we have the April ISM number which is expected to slip only slightly from 53.4 to 53. The prices paid component will also be closely watched for inflationary pressures given that March’s number surprised to the upside to 61, with April’s number expected to slip slightly to 59.
EURUSD – the trend line resistance at 1.3285 from the March highs continues to cap the upside and as such the onus remains for a continuation of the sideways consolidation seen since mid February. A break through 1.3300 targets the 200 day MA at 1.3475.
The lower line support on the triangle now lies at 1.3050, while there is also trend line support from the 1.3000 April lows at 1.3215.
The break of the larger triangle continues to remain the primary pattern and could well signal a 500 point move if it breaks out.
To open up the lows this year at 1.2630 we need to see a concerted break below 1.2975.
GBPUSD – the pound finally posted a negative day yesterday after ten successive up days. The positive momentum remains intact but the trend line resistance at 1.6330 from the 2011 highs at 1.6750 looks likely to cap any further gains in the short term given the overbought momentum.
This suggests we could see a downward test towards 1.6050 and the highs at the beginning of April.
Only a move below 1.6050 retargets the long term trend line support at 1.5920 from the January lows at 1.5235 which continues to act as support on the downside.
EURGBP – another 22 month low at 0.8122 yesterday keeps the downward momentum intact for a move towards the 2010 lows at 0.8065.
Only above the resistance at 0.8220 would retarget the larger resistance at 0.8280 as well as trend line resistance at 0.8300 from the February highs at 0.8505.
USDJPY – the downward momentum from last weeks move back inside the weekly cloud saw the US dollar slide back and find support at the 79.70 area initially. A break below 79.70 would then target 79.20 initially on the way to 78.35 and the 200 day MA.
The 80.45 cloud line should now act as a resistance level and for the dollar to stabilise we would need to see a close back above this key level.