Date: Monday 02 Aug 2010
The US dollar index closed lower for the 8th week in succession as doubts about the US recovery continued to weigh on the greenback, along with concerns about further monetary stimulus in the face of continued economic weakness. Better economic data out of Europe and more specifically Germany has also boosted the single currency at the dollar s expense.
Friday’s disappointing US GDP figures reinforced this perception of weak recovery coming in at 2.4%, against an expectation of 2.6% and seemed to reinforce St. Louis Fed President Bullard’s fears, expressed at the end of last week, that further monetary stimulus might be necessary to prevent deflation and increases in unemployment.
Further stimulus will also raise additional concerns about the size of the US budget deficit especially so soon after Moody’s lead sovereign analyst suggested that the US needs to articulate a credible plan to tackle its huge budget deficit, or face the threat of losing its triple AAA rating in the coming years.
To this end investors remain uncertain in the face of the conflicting signals being given by company earnings and recent US economic data. Sunday’s Chinese PMI data hasn’t helped that perception of investor unease as it fell to 51.2 in June its lowest rate in 17 months. The HSBC equivalent of the same measure slid below 50 for the first time in 16 months to 49.4. Readings below 50 suggest economic contraction.
The pound continues to remain strong against both the dollar and the Euro on the back of the mixed messages coming from the Bank of England regarding inflation and possible rate adjustments. This week’s rate meeting will not change anything with respect to monetary policy but the discussions could be quite interesting given the recent better economic data. Today we have manufacturing PMI for July which is expected to come in around 57.
In the US ISM manufacturing data for July is expected to come in around the same level around 56.2 and the prices paid component will bear particular attention given the recent concern about deflationary pressures. Expectation there is for a reading of 57.
EURUSD – last week’s rally towards 1.3105/10 stopped just short of the 1.3125 38.2% Fibonacci level. This remains the key target while above the 1.2950 area. A close above 1.3125 would target the 1.3500 area which is the 50% retracement level of the 1.5145/1.1880 down move. On the other hand a break of 1.2950 would open a test towards the 1.2840/50 level. A break below last Friday’s lows around 1.2840/50 re-targets the 1.2730/40 area.
GBPUSD – the pound continues to make new highs as it looks to push towards 1.5870 the 61.8% retracement level of the down move from 1.6880 to the May lows at 1.4230. The cable needs to hold above the 1.5520/50 support area and 50% level in the near term to prevent a deeper downward correction towards the 1.5330/40 area, but with momentum starting to become a little stretched there is a possibility we could see some sharp pullbacks in the interim.
Long term trend line support levels, remain around the 1.5280/90 area, from the June lows at 1.4350.
EURGBP – pretty much as you were on the euro here, stuck in a range between the pivotal resistance at 0.8400/10 area and the support around the 0.8320 area.
There does however appear to be a head and shoulders top building up here over the last 2 weeks with a horizontal neckline at 0.8315 which could produce a significant down move.
Only a break back above the 0.8400/10 level diminishes the risk of a downside correction.
A break and close below the 0.8315 neckline targets 0.8240, and then 0.8100, while 0.8410 caps.
Friday’s disappointing US GDP figures reinforced this perception of weak recovery coming in at 2.4%, against an expectation of 2.6% and seemed to reinforce St. Louis Fed President Bullard’s fears, expressed at the end of last week, that further monetary stimulus might be necessary to prevent deflation and increases in unemployment.
Further stimulus will also raise additional concerns about the size of the US budget deficit especially so soon after Moody’s lead sovereign analyst suggested that the US needs to articulate a credible plan to tackle its huge budget deficit, or face the threat of losing its triple AAA rating in the coming years.
To this end investors remain uncertain in the face of the conflicting signals being given by company earnings and recent US economic data. Sunday’s Chinese PMI data hasn’t helped that perception of investor unease as it fell to 51.2 in June its lowest rate in 17 months. The HSBC equivalent of the same measure slid below 50 for the first time in 16 months to 49.4. Readings below 50 suggest economic contraction.
The pound continues to remain strong against both the dollar and the Euro on the back of the mixed messages coming from the Bank of England regarding inflation and possible rate adjustments. This week’s rate meeting will not change anything with respect to monetary policy but the discussions could be quite interesting given the recent better economic data. Today we have manufacturing PMI for July which is expected to come in around 57.
In the US ISM manufacturing data for July is expected to come in around the same level around 56.2 and the prices paid component will bear particular attention given the recent concern about deflationary pressures. Expectation there is for a reading of 57.
EURUSD – last week’s rally towards 1.3105/10 stopped just short of the 1.3125 38.2% Fibonacci level. This remains the key target while above the 1.2950 area. A close above 1.3125 would target the 1.3500 area which is the 50% retracement level of the 1.5145/1.1880 down move. On the other hand a break of 1.2950 would open a test towards the 1.2840/50 level. A break below last Friday’s lows around 1.2840/50 re-targets the 1.2730/40 area.
GBPUSD – the pound continues to make new highs as it looks to push towards 1.5870 the 61.8% retracement level of the down move from 1.6880 to the May lows at 1.4230. The cable needs to hold above the 1.5520/50 support area and 50% level in the near term to prevent a deeper downward correction towards the 1.5330/40 area, but with momentum starting to become a little stretched there is a possibility we could see some sharp pullbacks in the interim.
Long term trend line support levels, remain around the 1.5280/90 area, from the June lows at 1.4350.
EURGBP – pretty much as you were on the euro here, stuck in a range between the pivotal resistance at 0.8400/10 area and the support around the 0.8320 area.
There does however appear to be a head and shoulders top building up here over the last 2 weeks with a horizontal neckline at 0.8315 which could produce a significant down move.
Only a break back above the 0.8400/10 level diminishes the risk of a downside correction.
A break and close below the 0.8315 neckline targets 0.8240, and then 0.8100, while 0.8410 caps.
USDJPY – last week’s failure to overcome the 88.00/10 level keeps the focus solidly on further yen gains in the short term and also keeps up the pressure on the Bank of Japan with respect to monetary policy. A close above here, unlikely at the moment, would signal dollar gains back towards 89.20/30.
The objective remains towards last year’s yen highs at 84.80 after last weeks new low at 85.95.
A break of 84.80 would look to target the 1995 lows below 80.00
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