FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Risk appetite was sell supported during the Asia session after Chinese economic data was more or less inline with Bloomberg consensus expectations but, crucially, was more benign than the market had feared going into the numbers. The Bank of Japan kept the policy rate range unchanged at 0-0.1% and changed neither the size of its monthly JGB intake, nor the size of its asset purchase facility. EURUSD traded 1.4346-1.4445, USDJPY 80.09-80.37.
Greece was downgraded by S&P, during the US session, but the euro soon recovered. The Fed’s Lacker was on the wires saying that recent data should prompt a ‘rethink’ on the outlook for growth. He remains in the hawkish camp though, saying the Fed should be wary of additional QE, and sees tightening in 2011 as a possibility.
EUR
S&P downgraded Greek Government debt 3 notches to CCC. They said that any sort of restructuring would likely “result in one or more defaults under our criteria.” The move followed Moodys and investors are unlikely to be surprised by further downgrades ahead. We stay short EURUSD as a trade recommendation via a 3m EUR put/USD call option with a strike at 1.35.
Dutch finance minister De Jager says the private sector must offer ‘substantial’ contribution if the Dutch are to agree to further Greek aid. This could take the form of extending debt maturities, he added. The Dutch view falls in line with the German Government and is further sign that northern European Governments are not willing to budge on private sector involvement in return for the new rescue package.
ECB’s Trichet said that the existence of non-standard measures don’t restrict the ability of the ECB to tighten monetary policy. April’s hike demonstrated the separation between the two. Trichet said while Eurozone unemployment was too high, inflation expectations must be anchored, which is no change in his overall tone.
A major London clearing house raised the extra margin requirements for Portuguese and Irish bonds to 65% and 75% respectively.
GBP
Martin Weale showed he has no intention of changing his hawkish stance. In a speech he said that “the reality is that any policy of holding the interest rate constant is likely to be unstable. The MPC must be prepared eventually to address above-target inflation by higher nominal and real interest rates&.[this is] why the Bank Rate should increase now”. The departure of Andrew Sentance from policymaking circles is unlikely to alter much at the BoE, as the hawks remain hawkish. However, the balance of power lies with Mervyn King and the (relative) doves and we are unlikely to see any changes in rates over the next few months.
Headline CPI is due and we are above consensus looking for 4.8% versus consensus of a slight fall to 4.4% from last months reading of 4.5%. We don’t look to buy GBP on an above-consensus number however, as the prospects of the BOE hiking remain stretched, even if the number does surprise to the upside.
TECHNICAL OUTLOOK
EURGBP 0.8750 support.
EURUSD BULLISH Recovery from 1.4300, initial support has put focus on resistance at 1.4500 ahead of 1.4551.
USDJPY BEARISH Scope for further losses towards 79.84 and 79.57, key level. Resistance lies at 80.69.
GBPUSD BULLISH Rise through 1.6384 exposed resistance at 1.6473 ahead of 1.6496. Initial support is at 1.6211.
USDCHF BEARISH Move below initial support at 0.8327 would pave the way for losses towards 0.8300 next. Resistance lies at 0.8500.
AUDUSD BEARISH Break of support at 1.0510 would expose 1.0441 next. Near-term resistance is at 1.0726.
USDCAD NEUTRAL 0.9799 and 0.9712 mark the near term directional triggers.
EURCHF BEARISH Break below 1.2000 would open 1.1811. Initial resistance lies at 1.2139.
EURGBP NEUTRAL Decline through 0.8793 has turned the model to neutral and exposed support at 0.8750. Upside trigger is at 0.8847.
EURJPY BEARISH Initial support is at 114.86, move below the level would open 114.47 and 113.88. Resistance lies at 116.87
SCHEDULE
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