After the upbeat start to the week with the much bigger than expected rise in the German ZEW for February, markets have had a sharp reality check over the past couple of days as both manufacturing and services PMI’s in the euro area, which had been expected to pick up, came in much weaker than expected with France in particular showing a much weaker tone.
This sharp dose of cold water, as well as the prospect of the warm blanket of Fed largesse being trimmed back a touch, has seen investors start to cash in on some of the recent gains, though anyone expecting the Fed to step back any time soon can expect to be disappointed.
This reality is likely to temper downside risk this morning with markets expected to open higher, however the uncertainty over the outcome of this weekend’s Italian election result is likely to limit any rebound.
Yesterday’s moves lower in equity markets was more to do with a change of perception on the part of the markets, than a change in policy at the Fed, in that the prospect of open ended asset purchases appears to not be as open ended as first thought.
What yesterday’s weaker than expected European PMI numbers have done is raise concerns that projections for 2013 European growth may be a touch on the optimistic side and while it is easy to dismiss the poor Q4 numbers as mere “rear view mirror” stuff, it is harder to do that with flash PMI’s which are very much more current. The German Q4 GDP contraction is expected to be confirmed at -0.6.
As such investors will be looking rather nervously at the latest German IFO numbers to see if they coincide with the ZEW optimism seen earlier this week.
It is likely that, unlike the exuberance of the ZEW that the February IFO numbers will be somewhat more pragmatic with the business climate index expected to rise moderately from 104.2 to 104.90.
Unlike the ZEW, which is a survey of investment professionals who tend to talk their own books, the IFO is a survey of German businesses that get to see the brass tacks of the day to day ebb and flow of the German economy. This means they tend to be more realistic about their assessments of economic activity.
Later on the European Commission is set to give its evaluation on the economic prospects of the European economy with respect to growth and unemployment forecasts, with particular attention likely to be paid to Spain, Italy and France’s growth prospects and the impact on their deficit reduction plans, with French officials already conceding that their 2013 growth target of 0.8% will need to be revised lower.
EURUSD – the break of the neckline on the head and shoulders pattern, and trend line support from the 1.2045 lows at 1.3215 now opens up the possibility of a longer term move towards the 1.2900 level. For this to unfold pullbacks need to stay below the neckline at 1.3320. If we head lower we can expect initial support to be found around the 100 day MA at 1.3120.
While below 1.3520 and the 200 week MA the bias remains for a move lower and also keeps the bearish weekly candle scenario of two weeks ago alive.
GBPUSD – yesterday’s rebound from 1.5140 appears to have overcome the resistance at 1.5270 which had been support for the last 2 years and also the June 2012 lows. The daily hammer suggests some scope for a rebound with a move above 1.5300 arguing for a larger short squeeze towards 1.5480.
The longer term target remains for a move towards 1.4950, the July 2010 lows.
EURGBP – yesterday’s sharp fall from the 0.8770 area and trend line resistance from the October 2009 highs could well see a retest of the 0.8580 area and key support. Only above the 0.8770 area targets a series of highs in July/August 2011 at 0.8880.
We need to get back below 0.8580 to retarget a move lower towards the lows of last week at 0.8460.
USDJPY – still in our broad range between the 94.00 level and support at the 92.20 area with a break out either side likely to suggest a sharp 200 point move higher or lower.
Below 92.00 suggests a move towards the 90.30 level and 29th January lows. A move through 94.00 targets the 95.00 area and 2010 highs.