G7 ambiguity keeps markets on edge ahead of UK inflation report

Europe’s markets look set to open mixed this morning with the FTSE100 in particular expected to open significantly lower as a number of stocks go ex-dividend.

The G7 didn’t have their finest hour yesterday with a raft of ambiguous announcements that saw currency traders reach for the smelling salts on a day that owed more to keystone cops than anything else.

A morning statement that reaffirmed “fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments”, was construed by markets as pretty much giving a green light for Japan to continue its policy to tackle deflationary pressures.

This interpretation was soon contradicted by an unnamed G7 official who stated that the G7 is concerned about unilateral guidance on the yen, and that Japan will be in spotlight at G20 meeting in Moscow, and sending the yen sharply higher against the US dollar.

A further clarification from a UK treasury official only served to muddy the waters further by stating that the statement was not directed at any country in particular.

Anticipation about today’s latest UK quarterly inflation report at one point saw the pound weaken to its lowest levels against the US dollar since August last year, after yesterday’s CPI inflation numbers came in unchanged at 2.7%.

For the past week or so the pound has been sold off heavily in anticipation that the Bank of England will state that inflation will remain well above target for the next two years at least while the prospects for growth are likely to remain weak with a high probability that the Bank will downgrade its forecast for growth for 2013. If the Bank leaves its growth forecast unchanged then we could see the pound rebound quite strongly.

It is certainly no secret that the MPC would like a weaker pound in order to boost UK exports; however their success in talking the pound lower in recent weeks is likely to increase inflationary pressures at a time when Brent crude is near 9 month highs with the UK being a net trade importer, while average incomes are being squeezed.

This set of factors doesn’t provide a great environment for economic growth at a time when consumers have little, or shrinking disposable incomes.

The Governor is also likely to reiterate his belief that the UK economy will continue to dip in and out of contraction but despite statements that the Bank will do further QE should conditions warrant, it doesn’t seem likely that we will see any further QE from the Bank before the Mark Carney starts in the summer.

The MPC has stated that it wants to continue to monitor the trickle-down effect of the funding for lending scheme which does appear to be having so much more positive effect on credit availability than the now dormant asset purchase scheme.

The health of the US economy is likely to be the focus of attention today, in the wake of last night’s State of the Union address by President Obama, with the latest retail sales numbers likely to offer clues about Q1 GDP, in light of the disappointing Q4 GDP numbers seen earlier this month.

The latest US retail sales numbers for January are expected to show a drop from the December rise of 0.5%, with a rise of 0.1% expected. This wouldn’t be a surprise given the sharp drop in consumer confidence seen in January and would not augur well for Q1 growth prospects.

EURUSD – resistance at 1.3490 continues to cap the upside and as such the bias remains for a move towards the January lows at 1.3250, given last week’s bearish weekly candle. Above 1.3500 argues for a retest of 1.3600.
The long term trend line support at 1.3165 from the 1.2045 lows is the major line in the sand for this uptrend.

GBPUSD – yesterday’s move below trend line support at 1.5645 from the 1.3500 lows in 2009, saw a sharp move to 1.5575 negating last week’s bullish reversal pattern. The resultant sharp pullback does give cause for worry about a sharp short squeeze as the market posts a daily hammer candlestick. We need to see a close below 1.5600 to target 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 move beyond 0.8580 took us all the way to 0.8630 before pulling back sharply. The bearish weekly reversal continues to hold sway but the volatility makes it hard to be sure with any degree of certainty. We need to get back below 0.8580 to retarget a move lower, towards 0.8480; otherwise we remain at risk for a potential return towards the highs at 0.8715.

USDJPY – a new high at 94.40 triggering stops above 94.00 before a sharp selloff to 92.95. With all the talk of G20 and BOJ later this week it will take something tangible to push the US dollar above the 2010 highs at 95.00. We could well see a drift lower heading into the weekend, towards last week’s low at 92.00. Only below the 90.30 level argues for a deeper correction towards key support at 87.50.