FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Risk sentiment has opened on a better footing in Europe despite disappointing headlines overnight. Initially the euro jumped sharply during the US session after The Guardian newspaper reported that France and Germany have agreed to create a leveraged EFSF worth EUR 2 trn. All gains were surrendered after the report was quickly denied by other wires. Adding to the mix, Moody’s downgraded Spain‘s sovereign rating by two notches to A1, taking it one notch below both S&P and Fitch. There was surprisingly little reaction in the euro, perhaps because attention is now squarely focused on the policy initiatives that may emerge from Friday’s meeting of Eurozone finance ministers and Sunday’s EU summit.
EUR
Moody’s downgraded Spain two notches to A1, outlook negative. S&P and Fitch still rate Spain one notch higher at AA-. There was surprisingly little FX reaction, and the euro only shed 20 pips before recovering. By way of rationale, the agency said the sovereign continues to be vulnerable to market stress and event risk, with its large borrowing needs and highly indebted banks.
The Financial Times reported French President Sarkozy saying that “an unprecedented financial crisis will lead us to take important, very important decisions in the coming days”.
The euro rallied 70 pips towards the end of the US session after the UK‘s Guardian newspaper said agreement had been reached on a leveraged EFSF with a size of EUR 2 trn. Dow Jones newswires soon afterwards quoted an unnamed source denying the story was true, and the euro gave back all its gains.
The spread of French 10y yields above bunds rose to 114bp during the European session – its highest level in 16 years – after Moody’s earlier implied that it might lower the outlook on France‘s rating over the coming months.
ECB Governing Council member Lipstok said the ECB did not cut rates at the October policy meeting because the inflation risks were balanced, and that a cut may not have had the desired benefit for borrowers due conditions in the banking system issues having “grown worse”.
The German ZEW survey came in softer than expected.
GBP
The Bank of England minutes for this month’s policy meeting are due and investors will be looking to see the thinking behind the decision to re-open the asset purchase program. Yesterday’s strong inflation print may have cast doubt on the sustainability of aggressive stimulus.
BoE Governor Mervyn King warned that ‘time is running out’ for authorities to coordinate international action and called for a ‘bold response’. He also noted that inflation should fall sharply ahead as base effects from higher energy prices and tax increases fade and warned that growth would ‘stall’ without fresh stimulus. He also warned that the economic recovery had ‘gone off track’ and it would take longer to restore normality to economic growth and fiscal conditions.
UK CPI came in far higher than consensus expectations, at +5.2% y/y – the highest print since September 2008. The ONS observed that the largest upward pressure came from increases in gas and electricity charges. Sterling suffered on the back of the news.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH Focus is on 1.3937, a break above which would open 1.4013. Initial support lies at 1.3653.
USDJPY NEUTRAL Initial resistance is at 77.49 and support lies at 76.31.
GBPUSD BULLISH Break above 1.5853 would expose 1.5945. Support lies at 1.5632.
USDCHF NEUTRAL Resistance is at 0.9123 while support lies at 0.8881.
AUDUSD BULLISH Key resistance is at 1.0335/99 area; a break of which would signal scope for extension of gains towards 1.0478. Near-term support lies at 1.0102.
USDCAD NEUTRAL Near-term directional triggers are at 1.0339 and 1.0044.
EURCHF NEUTRAL Key resistance is at 1.2435; a break here would expose 1.2495. Support lies at 1.2218.
EURGBP BULLISH Focus is on 0.8797, a break above which would open the way for 0.8842. Support lies at 0.8688.
EURJPY BULLISH Initial resistance is at 106.58, channel top drawn off July 4 high ahead of 107.68. Support lies at 104.02.
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