With the Fed meeting this Wednesday, it all depends on which Ben Bernanke deigns to show. The US dollar (DXY) has been in something of a freefall since failing to take out the 85.00 level. Given the fairly mixed economic data from the US last week, a more dovish tone could prevail from the FOMC.
Currently the action is residing at the 81.50/65 levels (76.4% retracement of the up-move from the 80.64 lows on 19 June). We could well be witnessing a modicum of relief for the greenback at this point. A break above the 82 level may confirm.
Q2 GDP expectations have been dramatically lowered, and the consensus is for a 1% annual rise in growth for the period April to June. There is a large scope for this to miss expectations.
The US economy may have added 185,000 in July – down from the 195,000 measured in June. We are also expecting the rate of unemployment to decrease slightly to 7.5%.
ECB rates – the euro strength recently can be attributed to better-than-expected PMI data in the services and manufacturing areas. We have also witnessed ‘improving’ unemployment data in Spain. A strong euro is not necessarily a cure to all that ails Europe, by any means. Lest we forget, there is still a fairly problematic tail risk associated with internal politics.
While the ECB has made intimations that negative interest rates could be in the offing, there is little to promote such a move. Banks will see their profits impacted negatively, and of course, given that much of the general problem with the eurozone lies in the fragmentation of the ECB transmission mechanism, there is a greater likelihood that another LTRO programme will be invoked.
No doubt much of the data from the UK has looked positive, from PMI numbers to Q2 GDP growth of 0.6%. This improved sentiment has been a salve for the beleaguered pound, yet much of the strength is more about dollar weakness.
Forward guidance is what it is: data dependent. There is still a chance we will see more QE from the newly ensconced BOE governor, even if inflation levels are on the high side.
The levels we are watching
S&P 500 – the market has tested but has yet to try the 1700 level, and until we clear this particular hurdle we are likely to be looking at a sideways market.
Dow Jones – the 15,600 level is the key to upside here. With most US earnings already discounted, along with the corporate outlook, we will be almost solely dependent on central bank rhetoric for direction.
DAX – here the 8400 level is the one to broach. Several key German companies confounded the markets with profit warnings last week, which has weighed on the German benchmark. We have the German elections coming up in September, which is also something of a barrier to confidence. A hint of downside may prevail if 8236 breaks.
EUR/USD – the 1.33 level has become a sticking point for the pair and has provided a decent level to go short over the past few attempts, albeit that the range is rather tight. A close below the 1.3250 level today could provide additional downside for the single currency. A myriad of short-covering above the 1.3320, as well as newly-positioned long euro orders, may also provide opportunity.
GBP/USD – the 1.54 level is too much for now. The same notion applies here, that many orders will reside above this, with a view that the pound will target the 200 DMA should there be a proper break and close above this 38.2% Fib level (Jan 2013 highs/July 2013 lows). We would suggest that the 50 and 100 DMA will hold firm for now, with the 1.5285 level likely to give support if we see an increased sell-off.
FTSE 100 – 6660/70 gave us some overbought levels on the RSI and provided a level that is a tough nut to break. The 6543 is the key to keeping the uptrend intact. Already tested last week with a marginally decent bounce, which ultimately failed the 6600 test, a breach of this support brings the 6500/6510 into question, leaving the 100 DMA coming in just below this at 6460. Above 6670 lies an overwhelming argument for a retest of this year’s highs.