The euro is in focus after the election in Germany

We are starting the week off with China’s flash HSBC manufacturing PMI this morning.

The survey shows that continued growth is expected in China, at 50.9 versus 50.1 in August. The official PMI for manufacturing and services data in the eurozone is expected to show growth in the region for a sixth month, which brings us to the focus on the euro. The much anticipated election in Germany has come to a close with Angela Merkel sweeping into power for a third term.

The election has gripped international interest as the eurozone is coming out of a recession and continuity is what the markets favour. This was seen in the euro breaking the 1.34 resistance level. While Germany remains the bright spot, pulling the eurozone out of the recession, and while business confidence remains elevated, it is a very different picture in the periphery countries.

Greece is still in the throngs of trouble, and in need of more aid. Greece is currently drawing on $325 billion in financial aid, paid mostly by the Germans. A new round of meetings in Athens between Greek officials, the European Commission, the ECB and the IMF begins to discuss a further rescue package. Greece has been in six years of recession, with the highest unemployment rate of 28%.

The euro’s interest has been fuelled by the weakness in the US dollar. Given that the market is now talking about an October taper after Bullard’s comments, the dollar should bounce off the bottom, which will put some pressure on the euro. Nevertheless, the bulls are evident in the euro and further consolidation is expected before a possible retest of the high in 1.3711 on 1 February.

EURUSD_KT_230913_2

GBP – Consolidation period

Sterling has done very well this month as the UK’s economy surprised on the upside and gained momentum. GDP for Q2 was upgraded from 0.6% to 0.7%, 3.2% below its peak pre-crisis level of 2008, placing sterling as the fourth best performing G10 currency against the dollar. Since finding a bottom on 9 July, the British pound has gained 7.7%.

“Exports and business investment were key drivers of the expansion which rebalances the economy away from domestic consumption”, said Chris Williamson, Chief Economist of data provider Markit. The rally seems to have lost its momentum since late last week, and we expect prices to consolidate between 1.6000 and 1.6140.

GBP/USD 230913

USD/JPY- Japan’s economy showing recovery

Japanese Prime Minister Shinzo Abe is set to announce the widely debated sales tax officially on 1 October, according to the Asahi newspaper. With the decision to raise the tax from 5% to 8% to finance Japan’s debt load, the IMF estimates that Japan’s gross debt will reach 245% of economic output this year, and GDP to expand an estimated 1.9% this year.

The BOJ has put in place stimulus measures to counter the higher tax rate and Abe is pushing for a cut in corporate tax rate. There are positive signs in the economy with movements in real estate rising 85% for the first half of the year. There’s a clear recovery in exports rising 14.7% from a year earlier, and department store sales in August rose 5.6% from a year earlier. Although the wider consensus is for a stronger yen, we still see the dollar yen pushing past 100.

USD/JPY 230913

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