FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Risk sentiment has been stable in Asian hours, with most regional stock market indices trading in the black. The improvement in sentiment was mostly a reaction to yesterday’s constructive performance of US equities, which advanced on the back of several better-than-expected earnings releases. Conditions at Japan’s nuclear plants are still being closely followed, but without deterioration in the news flow and as the notion intensifies that reconstruction will support economic activity, investors’ buying interest in Asian stocks has endured. Indeed, Japanese finance ministry data shows non-domestic investors have been net buyers of Japanese stocks recently. Elsewhere, the EU leaders summit continued to attract attention, with a press conference scheduled for later today. EU leaders have reached an agreement with respect to the Eurozone rescue fund. On a different note, the euro has been capped following another ratings downgrade of Portugal. EURUSD traded 1.4182-1.4163 and USDJPY traded 80.97-81.03. Data-wise, the third estimate of US Q4 GDP and the final March reading for the University of Michigan confidence index will be released today. In addition the German Ifo data will be closely followed.
EUR
The euro has been capped overnight, mainly in reaction to S&P downgrading Portugal by two notches to BBB. The agency cited political uncertainty as the main motivation for the downgrade and said another downgrade is possible early next week, depending on the final shape of the Eurozone bailout fund.
EU Council President Van Rompuy said EU leaders agreed the EFSF will have EUR440 bn effective capacity by June. For the Eurozone fund as of 2013 it was agreed that EUR16bn would be paid in per year over 5 years, instead of the EUR40bn upfront that had initially been agreed on Monday. German Chancellor Merkel had said yesterday that the EU summit will agree to a package to aid the euro. Portuguese government officials brushed away speculation that a bailout was inevitable.
We do not expect Portugal-related tensions to have any lasting or material impact on the euro. Ultimately we believe that rate expectations will remain the currency’s main driver unless confidence for the Eurozone as a whole starts to suffer again.
JPY
In line with market expectations core CPI in March fell by 0.3% y/y (previous -0.4%). Still declining consumer prices suggest that the underlying deflationary trend remains intact. However, as the BoJ is already in emergency mode, the latest data is unlikely to have any major impact on the central bank’s monetary policy stance.
GBP
Sterling took several knocks on the combination of bad data and commentary yesterday. Retail sales were below expectations at -1.0% m/m and the figures for January were also revised lower. This comes on the back of a relatively disappointing BoE minutes release. And BoE Chief Economist Spencer Dale maintained his view that growth and inflation risks justify rate increases but also said he can reverse his vote if growth turns out to be weaker than expected. Given the recent shifts in the global economic outlook, this may hold a higher probability in the coming months, though inflation is expected to remain elevated.
Moody’s warned earlier that risks of slower growth and weaker fiscal consolidation could endanger the UK’s AAA rating. They warned risks to UK growth were skewed to the downside right now and the economy is still particularly challenged.
TECHNICAL OUTLOOK
EURGBP 0.8818 resistance.
EURUSD BULLISH Sustained break through the 1.4249/82 resistance area would open up the way towards 1.4373. Initial support is at 1.4054.
USDJPY BEARISH Remains heavy below 82.01; initial support is at 80.00 ahead of 78.83.
GBPUSD NEUTRAL Initial support is at 1.6977/64 zone, while resistance is at 1.6267 ahead of 1.6401/58 area.
USDCHF BEARISH While resistance at 0.9198 is intact, focus is on initial support 0.8964 ahead of 0.8852 key low.
AUDUSD BULLISH Rise through 1.0202 has exposed key resistance at 1.0256. Initial support lies at 1.0065.
USDCAD BEARISH Focus is on the downside with initial support at 0.9705 ahead of 0.9668 key low. Resistance at 0.9844.
EURCHF NEUTRAL Initial resistance is at 1.2945, support at 1.2736.
EURGBP BULLISH Sudden climb through 0.8761 and 0.8787 has exposed 0.8818; a break here would expose 0.8885. Near-term support is at 0.8664.
EURJPY BULLISH Focus is on 115.57, clearance of this level would open the way towards 116.00/68 area. Support lies at 113.56.
SCHEDULE
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