Date: Tuesday 22 Jun 2010
Yesterday’s early optimism over China’s decision to relax its currency peg could have been likened to “much ado about nothing” as early optimism gave way to an element of realism.Yes, China has relaxed its peg, but any adjustments are likely to be on a very gradual basis and it would appear that the People’s Bank of China is playing a very canny game with the US administration ahead of this weekend’s G20, promising a little, but not too much, so as to give the impression of co-operation, but doing it at a time and pace of its own choosing.
Continued concern about European sovereign risk continues to weigh on sentiment after Fitch ratings downgraded BNP Paribas’ long term issuer rating to AA- as fears returned about Europe's ability to deal with its debt problems.
Today the UK will be in the market spotlight as UK Chancellor George Osborne delivers his first budget, and the long awaited emergency budget.
Gilt yields have fallen around 50 points since the new government came to power and the markets will be looking for further evidence of government intent to implement measures to tackle the fiscal deficit.
Particular attention will be paid to the balance between spending cuts and tax hikes, and the ability of this budget to tread the fine line between cutting the deficit, as well as not shaving too much of future growth prospects, and possibly tipping the economy back into recession, as some commentators, like ex MPC member David Blanchflower have warned.
Measures in the budget are expected to include some form of bank levy and a reform of welfare benefits, and public sector pay.
The budget is expected to be the toughest in over 30 years, so it is unlikely to win the Chancellor few friends and could well raise tensions within the new coalition government.
What the markets will not countenance is a political budget of sleight of hand which dodges the underlying issue of deficit reduction.
EURUSD – yesterday’s failure to take out the trend line resistance at 1.2480/90 trend line resistance from the 14th April highs at 1.3690, has seen the single currency come back lower, posting a bearish key day reversal in the process.
This leads us to question whether the recent rally of the last few days may have come to an end. The extent of dips so far has been the 1.2250/60 level and a move below here could well be a precursor to a test back towards the 1.2135/45 level which remains a pivotal level in the near term.
There is a chance we could see a squeeze higher towards 1.2750 on a break of 1.2500, but yesterday’s sell-off has diminished the likelihood of this scenario. The long term outlook remains for a weaker Euro and a test towards the 2005 lows, around 1.1650.
GBPUSD – yesterday’s rally failed at the 1.4935 trend line resistance from the 19th January highs at 1.6460 and has since slipped back below the 1.4780 support from the June lows at 1.4350, also posting a key day reversal in the process.
We could now see a test towards 1.4680/90, a sustained break of which would no doubt re-target the 1.4510 area, if we are unable to retake the 1.4820/30 area in the short term.
There is also the trend line support from the 1.4230 lows of the 20th May at 1.4425/35, which should continue to support in the event we break below 1.4500. The key support level remains down at 1.4230/50.
EURGBP – the failure to take out key resistance above 0.8400 yesterday has since seen the euro slip back overnight.While the Euro continues to hold below this 0.8420 area the overall tone remains of selling the rally.
The Euro is currently finding an element of support around the 0.8320/30 area and we would need to see a break back below these levels to re-target the lows at 0.8210.
The twin lows at 0.8210, remain a key support but the all important 0.8170 area remains the primary objective.
USDJPY – the sharp rebound off yesterday’s Asia lows around 90.00 saw the dollar strengthen back above 90.70/80 pushing above 91.20 to hit 91.50 on an intraday basis as the yen weakened after China’s adjustment of its exchange rate peg.
The US dollar now needs to stay above 90.70/80 area to re-target the longer term resistance around the 92.20 area, a break of which would then target the 92.80/90 June highs.
For the moment it looks like the dollar is trading in a broad range between 90.20 and 92.20/30, with the 91.20 acting as a broad pivot.
No comments:
Post a Comment