Over the past three months the recovery in a lot of UK economic data has pointed to a recovery in GDP data for the third quarter, more than offsetting the disappointing contraction in Q2.
Whether or not you believe the Q2 figure was negatively skewed by the bad weather and the Jubilee bank holiday, which I don’t, the likelihood is that due to the Olympic Games, hopes are high that the preliminary Q3 GDP number will come in around 0.6%.
These expectations increased yesterday after Bank of England governor Mervyn King hinted that the MPC would have to think long and hard about adding to the stimulus measures implemented in July, while some politicians seized on remarks by Prime Minister David Cameron, that he had suggested they might well be better than expected.
Putting aside the fact the widespread expectation that they are expected to be positive anyway, a significantly good GDP number would almost certainly kill off any notion that the Bank will change monetary policy at its November meeting; even though yesterday’s poor CBI factory data suggested that problems still remain.
In Europe speculation about the latest Greek troika report continues to pull the market in both directions with Greek Finance Minister Stournaras claiming that the Greek government has agreed a two year extension on its budget, with its lenders, a claim which was swiftly denied by a German government official, on the grounds that no decision could be made until they had seen the troika report.
Speaking of the troika the Irish Finance Minister is expected to announce the outcome of their latest review into Ireland’s finances, sometime today.
The biggest worry for growth in Europe has now switched to the German economy after yesterday’s IFO and PMI data which suggests that the contagion in Europe has now infected the heartbeat of the Europe economy. Manufacturing PMI slid back sharply to 45.7, while all three IFO measures reinforced the feelings of gloom. If, as the data suggests, Germany is slipping into recession then the debt problem will only get much worse, and German yields could start to edge up.
In the US yesterday’s no change view from the FOMC didn’t come as too much of a surprise given some of the recent economic data, and today’s durable goods numbers for September are expected to continue in the same vein. The August numbers were pretty ugly, a decline of 13.2% pretty much cementing the likelihood the Fed would act in September, however the expectation is that we should see a recovery in September of 7.5%, while weekly jobless claims, after two rather contrasting weeks are expected to settle back down around the recent 370k average.
EURUSD – yesterday’s slide lower to 1.2920 brings the potential for a move towards the 200 day MA at 1.2835, as well as trend line support from the 1.2045 lows at 1.2865 ever closer. This remains the key level supporting further gains; otherwise we could well see a quick return to 1.2650.
On the upside the main resistance remains at trend line resistance 1.3110, from the 1.4940 highs.
Only a move above 1.3240, targets 1.3495, the 50% retracement of the entire down move from 1.4940 to 1.2045.
GBPUSD – cable did what it does best yesterday pulling back from the 1.5915 lows this week and recovering back above the 1.6000 level with the potential to move back towards trend line resistance at 1.6140, from the September highs at 1.6310.
This resistance remains the main obstacle to further gains keeping alive the prospect of a move back towards the 1.5820 area in the longer term, on a break below 1.5910.
EURGBP – yesterday’s caution proved to be well founded with the 200 day MA giving way sharply and opening up the move towards 0.8070.
This needs to hold to prevent further losses towards 0.8020.
The 200 day MA at 0.8110 now becomes resistance on any pullbacks, while behind that the tweezers top at 0.8160 should also act as significant resistance.
USDJPY – the US dollar appears to be struggling to overcome the 80.00/10 area, which is needed for the June highs at 80.60 to come in to focus.
We need to close above 79.80 on the week to open up a move to 81.00 which is the top of the weekly cloud.
To sustain this move higher any pullbacks need to hold above the 79.20 area, otherwise we could well see a fall back towards 78.50.