In a normal market yesterday’s positive US construction spending figures for April which showed an increase of 2.7%, the biggest rise in 10 years, should have been enough to allay investor concerns about economic recovery in the world’s largest economy. However these are not normal markets and with continuing fears about problems in the banking sector in Europe, tensions in the Middle East and a possible slow down in China not helping, sentiment remains fragile and risk aversion remains the favoured play with the Euro hitting fresh 4 year lows against the US dollar.
The latest financial stability report from the European Central Bank has warned of further bank write downs of up to €195bn in the next 18 months, as European banks continue to wrestle with their exposure to sovereign losses.
The single currency was further hit by a weekend report by the London based Centre for Economics and Business Research (CEBR), which suggested that the only way for Greece to escape its current debt problems would be to leave the Euro. The CEBR suggests that this move is all but inevitable, and that French and German banks would be hardest hit.
Economic data didn’t provide any respite either with EU unemployment increasing to 10.1%, and German retail sales for April declining year on year by 3.1% against an forecasted decline of 0.7%.
The pound’s fortunes have been somewhat better over the past 24 hours with UK manufacturing reaching its highest level since September 1994, posting eight successive monthly gains driven by near record export orders to China, Europe, the Middle East and the US. These figures helped push the pound to near one month highs against a basket of currencies.
Political instability in Japan will weigh a little on the yen after last nights resignation of Japanese Prime Minister Hatoyama as the tripartite coalition looks for a successor.
EURUSD – another 4 year low against the US dollar at 1.2112 yesterday, however the lack of follow through again prompted another rally, this time towards the channel line resistance at 1.2360, which has so far been rebuffed. The markets appear to be somewhat nervous about possible central bank intervention, each marginal new low being followed by a sharp rally.The 1.2135 level remains the proverbial line in the sand, and we need a daily close below here to set off a move towards the 1.1700 level, and 2005 lows.
For now this key 50% Fibonacci level has kept the declines at bay, but with rallies becoming shallower the risk still remains for an eventual break.
The Euro needs to see a break above the 1.2450/60 level for a move towards 1.2700 to unfold.
GBPUSD – the pound continues to benefit from increasingly positive economic data. Yesterdays early slip towards trend line support 1.4440/50 provoked the rally we were looking for and the move towards the 1.4780 level. While we stay above trend line support which is now at 1.4480, the odds continue to favour a test higher toward the 1.4780 level, and possibly even 1.4850.
Key support level remains around the 1.4230/50 level and remains the key barrier to any further sterling declines in the short term. The 1.4000 level remains a key support on a monthly close.
EURGBP – the positive sterling data and negative Euro data pushed the Euro below the key 0.8400 2 year lows yesterday. Now that the single currency has closed below this key level further Euro losses look extremely likely. The next target remains the 0.8250 level on the way towards the 0.8170 level.
The 0.8170 level is a 50% retracement of the up move from the 2007 lows at 0.6537 to the 2008 highs at 0.9801.
USDJPY – the yen continues to chop between the support around 90.70/80 area and the recent highs around 91.75. The importance of the 200 day moving average is currently being neutralised by the current choppiness, but while the currency pair stays above its trend line support currently at 89.80, the potential for a higher US dollar remains. The recent political instability is likely to weigh a little on the yen as well.
The 92.80 level remains the next target while above 89.80 and the recent range support around the 90.70/80 area.
| GBP | AUD | CAD | JPY | EUR | CHF | USD | |
|---|---|---|---|---|---|---|---|
| GBP | 1.0000 | 1.7761 | 1.5530 | 134.7758 | 1.2076 | 1.7069 | 1.4742 |
| AUD | 0.5630 | 1.0000 | 0.8744 | 75.8840 | 0.6799 | 0.9610 | 0.8300 |
| CAD | 0.6439 | 1.1437 | 1.0000 | 86.7864 | 0.7776 | 1.0991 | 0.9493 |
| JPY | 0.0074 | 0.0132 | 0.0115 | 1.0000 | 0.0090 | 0.0127 | 0.0109 |
| EUR | 0.8281 | 1.4708 | 1.2860 | 111.6097 | 1.0000 | 1.4135 | 1.2208 |
| CHF | 0.5859 | 1.0405 | 0.9098 | 78.9610 | 0.7075 | 1.0000 | 0.8637 |
| USD | 0.6783 | 1.2048 | 1.0534 | 91.4250 | 0.8191 | 1.1579 | 1.0000 |
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