Today’s main event is the much anticipated meeting of the FOMC where it is widely expected that the Fed will look to embark on a fresh round of asset purchases, or stimulus measures to boost the US economy, in the wake of last week’s disappointing non-farm payrolls data.
Given the tone of recent comments from Fed officials and the dovish tone of the last FOMC minutes, markets have built themselves into a frenzy of expectation that the Fed will deliver something today.
If it does do something then it will firstly have to admit that “operation twist” has been a failure and will have to look at how to wind it up.
They will then have to deliver on a market expectation that remains unquantifiable. The last lot of QE was $600bn in $75bn monthly tranches and it’s debateable as to the effectiveness of that, which suggests that to be effective now it would have to be open ended, and a lot more in terms of the US dollar amount.
An amount of less than $600bn could well be viewed negatively by the markets as not enough.
The major risk to the Fed is of one to its credibility with any action likely to be viewed as partisan with an election two months away.
The other question that needs asking is whether the recent data warrants further measures especially with stock markets at four year highs and oil prices at their current levels.
Hasty Fed action could drive oil prices higher and choke off the very growth the bank is trying to promote. Yesterday’s surprise rise in oil inventories suggests demand for the black stuff is dropping back.
The risks therefore remain high and QE is by no means the foregone conclusion or placebo markets may think it is. If the Fed disappoints and merely extends its low rate guidance into 2015, then the US dollar could bounce back quite sharply.
Back in Europe while yesterday’s German constitutional court ruling was greeted with widespread relief by the markets the conditionality imposed by the judges has the potential to come back and seriously limit the room for manoeuvre when the need arises, for the bailout mechanism to be activated.
For now the actions of the ECB and Mario Draghi in pledging to do whatever it takes to preserve the euro have driven yields sharply lower on Spanish and Italian bonds, and all without spending a single penny.
This appears to have bought European leaders some time to address some of the more immediate issues, namely the likelihood that Spain will need a sovereign bailout to go with its banking one.
Unfortunately the time looks likely to be wasted once more as Spanish PM Rajoy prevaricates over asking for aid, due to the recent fall in yields. Despite pressure from France to ask for help, his reasoning for delay is that the recent fall in yields suggests that the country does not need a bailout.
If economic data continues to deteriorate and there is no suggestion it won’t, we could see yields turn around quite sharply. Even so the fall in yields should help Italy get away about €7bn of bond sales at a much cheaper rate than this time last week.
The fact is Europe needs a growth plan which they currently they don’t have, with no indication that EU leaders have any clue how to come up with one.
In the UK the Bank of England is set to release its latest Quarterly Bulletin which like the last one is likely to look at the “productivity puzzle” of falling unemployment and sliding GDP. It could well also look at some of the expected effects of the recent launch of the funding for lending scheme.
EURUSD – the euro has so far managed to remain above the 200 day MA at 1.2830 pushing up to 1.2940 yesterday as it looks to close in on the 1.3000 area, which also acted as the March and April lows. A break here has the potential to test 1.3250.
A close back below the 200 day MA could suggest a move back towards 1.2650.
Key trend line support from the 1.2045 lows now lies at quite some way back at 1.2510, while above that we also trend line support at 1.2540 from the 22nd August lows at 1.2435.
GBPUSD – the pound came within touching distance of downtrend line resistance at 1.6175 from the 2011 high at 1.6745 yesterday and this is a key barrier to a move towards the May high at 1.6305.
Trend line support comes in at 1.5910 from the August lows at 1.5490. Only a break below 1.5860 has the potential to target 28th August lows at 1.5755. The long term trend line support lies at 1.5585 from the 1.5240 lows.
EURGBP – the single currency continues to find support just above the 0.7950 area; however it continues to struggle to make much in the way of gains above the 0.8020 area. As long as any pullbacks hold above the 0.7950 level a push towards 0.8100 can still happen.
Below the 0.7950 level suggests a move towards the 0.7880 level.
A break below the 0.7880 level has the potential to retarget the 0.7820 area.
USDJPY – the US dollar continues to come under pressure and near the June lows at 77.65 which would be the last obstacle to a move towards the all-time lows at 75.35.
We need to get back above the 200 day MA at 79.31 to target a return towards the highs last month.