German IFO and UK GDP in focus

Market optimism about Germany’s economic recovery from its Q4 blip continues to grow apace after yesterday’s better than expected January flash manufacturing and services PMI data surprised to the upside. Following as it did on the sharp rise in the ZEW survey on Tuesday, today’s IFO business climate figures for January take on an extra resonance.

While the ZEW is a barometer of investor and market sentiment the IFO is a much more accurate measure, given that it is a gauge of how German businesses feel about any changes in the economic outlook, with respect to hiring, investment and spending.

Expectations are for a rise from December’s 102.4 to 103.10, but given this weeks PMI and ZEW numbers the figure could well come in much higher. Anything below expectations would be a surprise and could puncture this week’s rally in the single currency.

Also today the ECB publishes the data on the amount of LTRO cash that is due to be repaid and this could well be a market mover, especially if the amount repaid is very small. This would suggest that banks are still having liquidity problems and could prompt a pullback. On the other hand a large repayment could well have the opposite effect.

The health of the UK economy is also set to come under the microscope this morning, with the first publication of Q4 GDP, and expectations have gradually been revised lower in light of the recent disappointing retail sales and services PMI data seen over the last few months.

In the last few days we’ve seen sterling long positions been given a good shake out, as the pound has dropped sharply across the board in anticipation of a poor number. Expectations are for a negative quarter of -0.1% after Q3’s Olympics enhanced 0.9%, however this is the optimistic scenario with some estimates of -0.5% being bandied about on a worst case scenario.

This in turn will ensure that the whole of 2012 will show a net contraction in the UK economy and increase speculation about further action from the Bank of England at next month’s MPC meeting.

With Chancellor George Osborne rejecting the option of a Plan B from the IMF, expect the pound to come under further pressure in anticipation of an imminent ratings downgrade as well as speculation about the discussion of additional measures, whether or not they ultimately get delivered.

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 – yesterday’s break below 1.5815 now opens up the possibility of a test towards 1.5680 the 61.8% retracement of the 1.5270/1.6380 up move. There is also long term trend line support at 1.5620 from the 2009 lows at 1.3500. The 200 day MA at 1.5910 should now act as resistance.

EURGBP – the break above 0.8420 sets us on course for 0.8576, the 61.8% retracement level of the down move from 0.9085 to the lows at 0.7755. Having acted as a top for so long the 0.8425 level should now act as support on any pullbacks. Long term trend line support at 0.8110 comes in from the 0.7755 lows.

USDJPY – break above the previous highs at 90.25, reinforces the argument for a move towards the 94.00 level. A move above 90.80 could well be the catalyst for this to unfold, however we do remain extremely overbought, making the market susceptible to sharp pullbacks towards 88.50 if we fail to take out this week’s highs.