We look set for another positive start this morning after yesterday's rather dovish comments from FOMC member James Bullard
who appeared to be in no rush to raise market expectations of an imminent Fed taper. Contrasting that with his comments after the September FOMC meeting when he said a taper was a close call, the contrast could not be more marked.
His comments on inflation suggest that the Fed would be in no rush to pull back from its current stimulus path.
This may change next year when both Plosser and Fisher, both more hawkish, become voting members, but for now investors are erring towards caution ahead of this week's October payrolls report.
Also helping this morning is a fairly positive China HSBC October services PMI report
which would appear to confirm the positive reading from the official government figure at the weekend, reinforcing the belief that the move towards rebalancing the Chinese economy appears to be proceeding as planned.
In Europe the troika are returning to Athens
as the perennial problem child of Greece grapples with another shortfall in its 2014 finances. One thing is certain, whatever the size of the fiscal gap, a fudge of some sort will be found to release the next tranche of funds. The main problem remains the IMF whose future participation is contingent on Greece's debt being sustainable, which it clearly isn't.
After last week's sharp falls in the euro it would appear that cooler heads have prevailed with respect to expectations of a rate cut this week.
While some have suggested we could get an ECB rate cut this week, yesterday's economic data would suggest that the recent recovery remains on the side of expansio
n, France notwithstanding, though tomorrows services PMI data may well tell a different story.
Furthermore when looking at a decision to cut rates markets need to really look at where we were last week.
No one was talking about an imminent ECB reduction in rates a week ago, yet here we are a week later and everybody suddenly thinks a rate cut is imminent.
While the reasoning for such an action may well be sound it would go against everything the ECB has been known for in its years of existence.
The ECB has always been a conservative central bank,
and any reaction this week to last week's data would be highly unusual, and could well be interpreted as a knee-jerk reaction to one or two pieces of data. It seems more likely that we may get some action in December, which may be flagged up at the press conference on Thursday.
Furthermore is last week's data really telling the ECB anything they don't already know about the European economy
? I very much doubt it and it's doubtful a rate cut would have that much of an effect even if they were to act this week.
There is also the fact that the Bundesbank may not support a cut
given that Germany's economy seems to be ticking along nicely, and that the recovery being seen in Spain and Italy's PMI's suggests that the current policy is working.
The UK economy is also ticking along nicel
y and Q4 has got off to a fairly solid start if the latest October PMI data are anything to go by. Yesterday's construction was the best number since 2007, not surprisingly led by house builders, but not confined to them, with civil engineering also seeing good gains.
Today's services PMI would round off a nice three card trick
and justify the upgrading yesterday by the CBI of the UK's growth forecasts for 2013 and 2014. Expectations are for October services PMI to come in slightly lower than the September number of 60.3, at 60.0.
- we've managed to hold above the 1.3450 level for now, after last week's bearish engulfing week, and as such the prospects for a rebound towards 1.3650 remain intact, while the trend line support from the 1.2750 lows holds.
A break below 1.3450 could well signal further losses towards the 1.3000 level in the coming weeks.
- the double top support remains at 1.5890/00 and while above this the potential for a rebound remains high. On the upside the 1.6110 level remains the key resistance to mitigate the downside bias. A break below 1.5900 has the potential to target a move towards 1.5750.
- the euro continues to chop against the pound with key support remaining at the 0.8420 level and four week lows. While above here squeezes back towards the 0.8520 remain a risk. A move through 0.8420 retargets the October lows at 0.8330.
- trend line resistance at 99.15 from the May highs at 103.75 remains the key obstacle to a move back through the 100 level.
Support remains just below the 200 day MA at 97.45 at 97.20 trend line support from the 25th Feb lows.
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