Monday night’s ill conceived decision by the German authorities to act unilaterally with respect to a short selling ban sent the Euro to its lowest levels since April 2006 yesterday, as German Chancellor Angela Merkel played party politics with the financial markets in an attempt to rally support for the euro bailout package which is due to be debated in the Bundestag today.
Her comments that “the euro is in danger” and the consequences of a failure to act would be “incalculable,” as well as criticism from other Euro zone leaders about the unilateral nature of the action, nearly sent the single currency over the edge.
It was only intervention yesterday afternoon by the Swiss Central bank which dragged the single currency back from the brink, which probably prevented a total meltdown.
What is apparent though is the uncertainty and fear that this action has caused in the market. The nature of the ban on specific financial stocks has understandably spooked investors and really begs the question, what do the German authorities know that the market doesn't?
Whether this Euro rally proves to be a temporary respite, or a change in direction, remains to be seen, but the actions of Germany over the past few days have done little to reassure investors that there is, or will be, a fully co-ordinated response to dealing with the crisis in Europe over the coming days and weeks.
Away from Europe there was other news with the release of the FOMC minutes for April. There were no real surprises with the Fed raising their growth forecasts for 2010, but the minutes did show that there was no real desire amongst them to offload the $1trn worth of mortgage backed securities any time soon, due to the fragile state of the housing market.
The benign inflation outlook also prompted the retention of the phrase “rates to remain low for an extended period”, and make the likelihood of a rise in US rates in the short term unlikely. This was borne out by yesterday’s CPI figure for April which came in at -0.1%.
Kansas City Fed President Thomas Hoenig remained the sole dissenter to the retention of the “extended period” language.
The Bank of England in its minutes, also released yesterday, maintained its belief that inflation would eventually fall back towards the 2% level and maintained its low rates stance.
UK Retail sales figures for April due out today should give some idea of how much the consumer has been affected by political uncertainty ahead of this month’s general election. The consensus is for a month on month rise of 0.3%.
EURUSD – the Euro more or less hit the long term target of 1.2135 yesterday, posting a low of 1.2143 before rebounding in the afternoon after the Swiss National Bank was reported to be buying Euros and selling Swiss francs.
The daily charts posted a bullish engulfing candle pattern, which suggests we may well have seen a short term base, which could provoke a move back towards the 1.3000 level. However for this scenario to play out we would need to see a break above the 1.2450/60, level first. A break and close below 1.2135 50% retracement level support would suggest a move towards 1.1700, while a break above 1.2450/60 could well target 1.2750.
GBPUSD – the pound was caught in the backwash of the short selling ban as investors piled into safe haven dollar buying. However it has also benefited from the rebound back and pulled away from the twin lows between 1.4230/50. These lows remain the key obstacle to a test of the next support around 1.4110 which is the 30th March 2009 lows on the way to a test of 1.4000. 1.4000 remains a key support on a monthly close. 1.4500/20 remains the key obstacle to a test of 1.4780.
EURGBP – continues to trade in a broad range between 0.8500 and 0.8620. A break of 0.8500 should target the lows around 0.8400, and then a break lower towards 0.8250. A break above 0.8620 would re-target the 0.8730 area.
USDJPY – continued risk aversion has continued to favour the yen, and the 91.20 area was breached as the dollar hit a low of 90.95 as investors bought yen. The subsequent rally has seen the dollar rally back towards 91.80. With the current risk off scenario playing out, rallies could well be restricted to the 92.15/20 area, as the yen benefits from its status as a safe haven. The risk remains for a test back towards 91.00 and a longer term move towards 90.30.
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