European equity markets once again look set to open higher this morning as political leaders in Washington discuss support for a framework of a deal which will in all likelihood require significant compromise on both sides as the end of year deadline swings into view. The details still remain sketchy but markets appear encouraged that some form of deal could well be forthcoming.
Benign peripheral bond markets, along with an upgrade for Greece from ratings agency Standard and Poor’s from “selective default” have encouraged a much less risk averse environment over the past two to three days in Europe’s markets. Investors have been putting money back into Italian and Spanish bond markets and pulling money out of German and UK bond markets, narrowing spread differentials quite sharply.
The single currency has hit levels last seen nearly 8 months ago, before the Greek elections, as investors venture out to keep German and French equity markets near to their highest levels this year.
Even the Spanish IBEX has recovered close to levels last seen in mid-September despite widespread protests over current austerity measures and a continued deterioration in distressed loans to yet another record high, as optimism wins out over deteriorating economic data,.
Today’s latest German IFO numbers could well offer a further boost to this prevailing mood after last week’s ZEW positive surprise. Expectations are for a slight rise in the December business climate from 101.4 to 102.00. As similarly positive number to last week’s ZEW figure will confound and confuse given this month’s sharp downgrade of German economic growth for 2013 to 0.4%, by the German Bundesbank, while the German government also suggested yesterday that they too would be adjusting down their forecasts for 2013.
This morning’s release of the latest Bank of England minutes will make for particularly interesting reading to see whether or not David Miles stuck to his view that more QE was still needed over and above the FLS scheme liquidity.
The minutes should also be of particular interest in the context of inflation expectations after yesterday’s latest CPI numbers suggested that inflation could well continue to remain high for quite some time to come, due to rising energy and food prices. Any concerns that suggest that further easing is likely to be pushed further out into 2013 are likely to see the pound gain further, particularly against the US dollar.
The expectation is that this stickiness in inflation will prevent the Bank of England from adding to its asset purchase program in the New Year, an expectation that has been reflected in UK gilt prices which have dropped sharply pushing yields back near to the 2% level.
EURUSD – we got the move higher we warned about yesterday with 1.3250 the initial resistance. The break higher now suggests further gains towards 1.3490 and the 200 week MA. The 1.3170 area should now act as support on any dips back below 1.3200.
A move back below 1.3170 suggests a deeper pullback towards 1.3020 and then 1.2880.
Only a move below the 1.2880 level opens up a move back towards the trend line support from the 1.2050 low, which now sits at 1.2825, and the 200 day MA at 1.2790.
GBPUSD – the pound remains on course to retest the November highs at 1.6310 which in turn could well see a move back towards the 1.6500 level. Support remains at 1.6180 which had acted as resistance on the way up.
Trend line support from the 1.5830 lows now comes in at 1.6090, while the key support remains at 1.5980. Only a break through here targets major trend line support at 1.5885 from the 1.5270 lows, the 200 day MA at 1.5880 as well as 1.5660.
EURGBP – stuck in a range here between November‘s high at 0.8165 which continues to cap further advances; while support at 0.8100 serves to limit the downside. The lack of pull back suggests a move to the 0.8300 level could be in the works. A break below the 0.8080 level suggests a move back towards 0.8040 and trend line support from the July lows at 0.7755 which remains the key level for the uptrend to continue.
USDJPY – we continue to remain on course for the 2011 highs at 85.55. Last week’s close at 83.55 should act as some form of support, though we could well slip back as far as the breakout level at 82.80.
If we do drop below this then there remains solid support at 81.70. If we break below 81.60 then the potential is there for a move towards 80.50, and even 79.90.