FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
After yesterday’s rather uninspiring performance by the heads of government of France and Germany, investor attention will turn to the Swiss government, along with the SNB, to see whether measures will be announced to counter franc appreciation. Although no specific times or measures have been flagged, press reports point to a possible exchange rate floor. Dow Jones wires reported yesterday that the Swiss government may hold a press event today. After yesterday’s Franco-German summit which did not yield any increases to the size of the EFSF or mention Eurobonds as a specific short term solution, there is an added impetus for the Swiss to act and failure do so will weigh on EURCHF. Yesterday Sarkozy and Merkel announced the creation of an Economic Council but said the size of the EFSF is enough for now, and intimated Eurobonds could only happen after economic integration is complete. The timing of this was significant given the ECB’s announcement yesterday that EUR22 bn worth of ECB sovereign bond purchases settled last week. The intention is for the EFSF to inherit responsibility for bond purchases by the end of this year. Clearly, if the EFSF is to maintain the pace of purchases carried out by the ECB last week, then the EFSF’s EUR440 bn capacity may not be enough in the long run. EURUSD traded 1.4351-1.4417, and USDJPY 76.63-76.83. BoE minutes are due today.
EUR
An eagerly-awaited press conference by German Chancellor Merkel and French President Sarkozy caused some significant EURUSD volatility, but ultimately the euro soon settled back to previous levels. Eurobonds were mentioned, but Sarkozy made it clear that their introduction would only be entertained at the end of a long process of Eurozone integration.
The announcement that France and Germany had proposed an ‘economic government’ for the Eurozone caught the market’s attention and gave the euro a boost, although when further detail emerged it was clear the term was more attention-grabbing than it deserved to be. A new position as head of the Eurozone is to be created, and current EU Council President von Rompuy has been appointed to the position. The Franco-German proposals also call for all Eurozone countries to write a deficit limit rule into their constitutions by the Summer 2012. However, investors were unimpressed when Sarkozy announced the size of the EFSF would not be increased, and the euro sold off again.
German GDP growth came in at a surprisingly soft +0.1% q/q (cons. +0.5%). Our economists note that the figures are disappointing, though to some extent explainable as net trade was softer due to rising imports. In addition, construction dampened growth during the quarter while consumption surprised to the downside, contributing negatively to GDP growth. The figures dragged Eurozone GDP lower to 0.2%q/q (0.3% cons.).The Eurozone trade balance was also softer at EUR0.9bln.
GBP
BoE Minutes are due today and we expect the two voters for hikes last time to withdrawal their decisions and the committee voted unanimously to stay on hold. On the asset purchase vote Adam Posen is expected to be the lone individual in favour.
CPI came in above expectations at 4.4%y/y. The figures triggered a letter from BoE Governor King to the Chancellor, which ultimately contained very little new information. In his reply the Chancellor emphasised the government’s commitment to fiscal consolidation.
UK labour data is also due, claimant count is expected to rise by 20k and the ILO unemployment rate to stay at 7.7%.
CHF
Press speculation continues to encourage expectations of a major SNB announcement on Wednesday regarding currency policy. We are sceptical – although we believe the SNB will likely be forced eventually to carry out FX intervention to weaken the Swiss franc, there is little evidence to suggest they will act on Wednesday.
TECHNICAL OUTLOOK
GBPUSD 1.6478 resistance
EURUSD BULLISH A clearance of 1.4536 would open the way for gains towards 1.4697. Support lies at 1.4150.
USDJPY BEARISH A break below 76.25, the key low, would open the psychological level of 75.00. Resistance is at 77.86.
GBPUSD BULLISH The pair is testing 1.6478; a move above this level would expose 1.6547. Initial support lies at 1.6256.
USDCHF NEUTRAL The near-term directional triggers are at 0.8278 and 0.7549.
AUDUSD BEARISH A move below 1.0331 would pave the way for losses towards 1.0246. The key upside trigger is at 1.0641, a Fibonacci level.
USDCAD BULLISH A rise through 0.9919 would expose 0.9969. Near-term support lies at 0.9742.
EURCHF NEUTRAL Initial resistance is at 1.1663 while support lies at 1.1046.
EURGBP NEUTRAL A push above 0.8886 would trigger a bull trend while a move below 0.8643 would trigger a bear trend.
EURJPY BEARISH The cross has support at 108.93; a break below this level would open 108.03, a key low from Aug 11. Resistance is at 112.71.
SCHEDULE
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