The gains of recent weeks are starting to lose a little traction and it’s not too hard to see why when looking at the disappointing macro outlook, and renewed concerns about European growth prospects.
Greece is back in the spotlight after receiving its latest bailout tranche from the IMF, as concerns rise again about the likelihood of a third restructuring after Stournaras comments the other day.
It didn’t take long for Eurogroup chief Jean Claude Juncker’s concerns about a higher euro to be dismissed by other European policymakers, the most notable of which was ECB member Ewald Nowotny who suggested it was “not a matter of major concern”, while outgoing Italian Prime Minister Mario Monti was declaring the crisis over, which seems a little premature given his rather indifferent track record when it comes to making predictions.
It was about twelve months ago he was declaring the same thing with the LTRO’s and we all know what happened next.
Given that we saw Germany revise its growth forecast for 2013 down to 0.4% yesterday, in line with the Bundesbank, the current environment doesn’t, appear to be giving European policymakers too many concerns, despite the bleak outlook for growth across all of the Eurozone for this year.
I would expect that to change if the single currency continues to rise, and growth and unemployment numbers in Italy and Spain continue to go in the wrong direction.
The publication of this month’s ECB monthly report is expected to reflect the more stable economic environment referred to by ECB President Draghi at his press conference earlier this month, when he referred to “positive contagion,” though he did remain downbeat on the economic outlook.
The relative calm so far this year with respect to European markets has seen bond yields for Italy and Spain come down sharply over the past few weeks, giving both governments a much more benign environment as they look to raise as much money as they can before markets start getting nervous again.
There was a time when Spanish bond auctions were the equivalent of a trip to the dentist for the Spanish government, however given the recent more benign environment, today’s sale of €4.5bn of 2015, 2018 and 2041 bonds shouldn’t present too many problems, if the auctions so far this year are any guide.
Last night’s US Fed Beige Book of economic conditions painted a picture of uncertainty in December with concerns about political grandstanding holding back companies from making business decisions until there is more certainty with respect to the fiscal cliff decision.
Areas of concern include manufacturing with declines in activity seen in a quarter of the regions.
There were more bright spots than dark ones with housing continuing to show resilience while the energy sector was also positive. The latest housing starts data for December, due later today is expected to show a 3.3% rise for December.
Employment remained a concern with little evidence of a marked improvement while today’s weekly jobless claims are set to come in at a slightly lower level to last week at 365k.
After this week’s disappointing Empire manufacturing survey saw a negative figure for the second month in a row, there is a concern that the January Philadelphia Fed survey could be similarly disappointing. Expectations are for a rebound from 4.6 to 6, however analysts were similarly optimistic about this week’s Empire state survey and turned out to be wrong.
EURUSD – finding support at the 1.3250 level we could well see a rebound back through 1.3330 towards the 1.3400 highs in the medium term.
The key level remains at the 1.3500 level a break of which targets 1.3835, the 61.8% retracement of the 1.4940/1.2045 down move. Below 1.3250 targets 1.3170.
The long term support line from the 1.2045 lows now at 1.3025 remains the key level on the downside.
GBPUSD – yesterday’s dip through 1.6000 saw the pound find support at the major trend line support now at 1.5970 from the 1.5270 lows. A break below here could well signal further losses towards the 200 day MA at 1.5900
The key resistance remains at the 1.6180 level a break of which retargets the resistance at 1.6310.
EURGBP – yesterday’s pull back failed just below this week’s high at 0.8325, thus keeping the prospect of a pull back toward 0.8225, on a break below 0.8270 on the cards.
We need to remember this week’s bearish engulfing day and tweezers top on the daily charts. Long term trend line support at 0.8100 comes in from the 0.7755 lows. This week high at 0.8325 is now resistance for a move towards the 0.8420 level, which is a 50% retracement of the down move from 0.9085 to the lows at 0.7755.
USDJPY – yesterday’s fall saw the US dollar rebound from the 87.80 level just shy of the 87.50 support. The long term target stays at the 94.00 level; however current momentum continues to look rather stretched, with a fall through 87.50 potentially seeing 86.75. We could well see some sideways price action between 85 and 90 over the next few days and weeks.