Yesterday’s downgrade by the IMF of their 2013 growth forecast for the euro area from 0.2% to -0.2% suggests that they are more pessimistic about the likelihood of a pickup in economic activity in the region than German investors were earlier this week.
This week’s better than expected rise in the ZEW survey has raised expectations that the Europe may finally be starting to see a turnaround. The perception has certainly been helped by the more benign environment in financial markets of late.
While lower bond yields and successful bond auctions certainly make investors feel more comfortable they certainly don’t guarantee a recovery in economic activity.
A better indication would be if the recent evidence of a turnaround in manufacturing and services PMI data is sustained with the latest preliminary figures from Germany, France and the euro area for January.
Expectations are for French manufacturing and services PMI to pick up from 44.6 to 44.9 and 45.2 to 45.5 respectively.
The German equivalent is expected to see a rise in manufacturing to 46.8 from 46 and for services to remain at 52. The broader euro zone measures are also expected to point to a slight improvement to 46.6 for manufacturing and 48 for services, still weak and in contraction territory.
If a reminder were needed of the problems facing the Spanish economy were needed the Bank of Spain provided it yesterday with an announcement that the Spanish economy contracted by 0.4% in Q4 and 1.3% for 2012 as a whole.
Today’s Q4 unemployment numbers aren’t expected to offer any encouragement either with expectations that the rate will rise to 26%, with youth unemployment above 56%, putting further pressure on non-performing loans which have continued to rise to record levels.
In the US the latest weekly jobless claims numbers are expected to push back higher again to 358k after last week’s surprisingly low 335k print, though that may well be revised upwards.
Last night’s latest Japanese trade data for December crystallised the importance of the recent weakening in the yen after it showed a record annual trade deficit for 2012, driven by fuel imports as well as lower exports. Decembers deficit came in at 641bn yen and reinforced the damage done by the recent rise in the Japanese currency done over the past few years to Japanese companies competitiveness.
EURUSD – the euro continues to range trade between 1.3400 and support at 1.3250.
A break through 1.3400 has the potential to target a move beyond the 1.3500 200 week MA level towards 1.3835, the 61.8% retracement of the 1.4940/1.2045 down move. A break below 1.3250 where we have the base suggests a test towards the long term support line from the 1.2045 lows now at 1.3060 which remains the key level on the downside.
GBPUSD – the 50% retracement of the 1.5270/1.6380 up move at 1.5815 continues to hold for now on the downside. A break would nevertheless probably signal further losses towards 1.5680. The 200 day MA at 1.5910 should now act as resistance. The pound needs to push back through 1.6050 to retarget 1.6130.
EURGBP – the 0.8420 50% level continues to cap the market for now. A concerted break has the potential to target 0.8576, 61.8% retracement level of the down move from 0.9085 to the lows at 0.7755. The 0.8325 level should now act as support on any pullbacks. Long term trend line support at 0.8100 comes in from the 0.7755 lows.
USDJPY – yesterday’s declines could well precipitate a deeper sell-off towards 87.80 initially with a break of 87.50 targeting the 85.00 level and the 200 week MA. To mitigate this risk we need to pull back through the 89.00 area to retarget the 90.00 level.