UK in focus as OECD comes to town

Yesterday’s surprise rebound in UK services PMI in January has raised expectations that the UK could avoid the so-called “triple dip” recession scenario predicted by a number of economists.

Following on as it did from this week’s encouraging BRC retail sales numbers for January it has done a little to lift the veil of pessimism which has seen both construction and manufacturing sectors disappoint in the past few days.

These unexpectedly positive developments appear to have been overlooked by currency traders who sent the pound to its lowest levels against the US dollar for 5 months yesterday, while sending the euro to 7 month highs, even though the data makes it highly unlikely that the Bank of England will do any more QE anytime soon.

While scepticism about the UK recovery has been widespread it doesn’t appear to have infected the OECD who have been much more optimistic about the UK economy of late, arguing three weeks ago that the UK’s growth trajectory has been one of the stronger economies in the G7 over the past few months.

Today the OECD gives its outlook for the UK economy for 2013, and given that in November it slashed its growth forecast to 0.9% for this year, the Chancellor will be hoping that they don’t take a scalpel to the forecasts again, especially given the recent entreaties by the IMF for the Chancellor to consider changing course with respect to the government’s current economic approach.

In Europe, political concerns about Spain and Italy appear to have been put to one side for now, while markets shrugged off a ratings outlook downgrade notice by Fitch on the Netherland’s triple “A” rating, while a number of under pressure politicians, have now been joined by French President Francois Hollande expressing concern about the recent rebound in the single currency.

Given some of the recent disappointing PMI data this isn’t an unexpected response, with the French President arguing that it is impeding Europe’s economic recovery, though it can’t be a coincidence that his intervention comes at a time when French economic data continues to get worse, and more worryingly is diverging away from Germany’s economic performance.

Germany on the other hand appears to be doing quite nicely apart from the odd bad data item, and today’s factory orders for December are expected to show a recovery of 0.7% from the 1.8% decline seen in November. On a year on year basis that still equates to a 1.2% decline though.

Any improvement here is likely to keep a fairly bid tone behind the current euro rally, though further flare ups in Spain and Italy will always have the capacity to send the currency sharply lower.

EURUSD – Monday’s bearish engulfing pattern continues to point to early indication of a pullback, despite yesterday’s rebound. Only beyond 1.3700 negates and argues for 1.3850.
First stop is likely to be the 1.3400 level, while below that we have the 1.3250 level the January lows. The long term support line from the 1.2045 lows now comes in at 1.3130 which remains the key level on the downside.

GBPUSD – breaking below the 1.5680 61.8% retracement level of the 1.5270/1.6380 up move, saw the test of the 1.5630 trend line from the 1.3500 2009 lows.
A break of this line opens up the 2 year range lows at 1.5270.
The pound needs to close back beyond the 200 day MA at 1.5910 to stabilise and diminish the downside risk.

EURGBP – the pullback to 0.8550 yesterday prompted a sharp rebound as the single currency gyrates between support and the highs last week at 0.8715. A move through here targets 0.8780.
The failure to rebound beyond Monday’s high keeps alive the dark cloud cover daily reversal, but only just. The 200 week MA and 0.8525 level should continue to act as support on any pullbacks, with only a push below re-targeting the 0.8425 area. Long term trend line support at 0.8115 comes in from the 0.7755 lows.

USDJPY – the US dollar finally hits the 94.00 level, which is 38.2% retracement of the down move from the 2007 highs at 124.15 to 75.30. We also have resistance at 95.00 which is the 2010 highs. Only below the 90.30 level argues for a deeper correction towards key support at 87.50.