Manufacturing PMI?s set to remain weak, as FOMC awaited
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Europe will once again hog the limelight this morning following on from yesterday?s abysmal unemployment data. This time the data in question is the final manufacturing PMI data for July from across Europe, with all readings expected to come in below the 45 level. Spanish and Italian PMI are expected to come in the worst with the last reading of Spanish PMI coming in at 41.1 while Italian PMI is expected to slip further from 44.6 to 44.1.
French, German and Eurozonemanufacturing PMI?s are expected to remain unchanged at 43.6, 43.3 and 44.1 respectively; highlighting perfectly the problems Europe is buckling under.
No growth and rising unemployment are a toxic mix, which irrespective of what happens tomorrow at the ECB rate meeting is the key issue facing European leaders whether they want to admit it or not.
Both Italian Prime Minister Monti and French President Hollande both reiterated yesterday that they both stood ready to ?do everything? to protect the euro.
Unfortunately markets tend to treat such comments with the indifference they deserve given that previous actions have rarely lived up to such statements.
Their words might carry more weight if they were prepared to give up the necessary sovereignty and oversight on fiscal discipline required to make the euro work better, which would then make a banking union more likely.
In the UK the latest data on the British economy isn?t much better after last weeks disappointing GDP number and this morning?s manufacturing PMI is expected to remain weak, though it is only expected to weaken slightly from the June reading of 48.6 to 48.4.
The main event of the day, however setting aside this afternoon?s ADP payrolls and US ISM manufacturing number is the latest US Federal Reserve FOMC rate meeting.
Markets have been building up expectations as to the timing of further policy easing measures for a while now in the wake of recent weakening US economic data.
Unfortunately after yesterday?s better than expected Chicago PMI and consumer confidence numbers for July, markets are likely to have to wait a little longer for their stimulus fix, as the likelihood of any indications of further QE in the near term, remain a little farther into the distance.
Even allowing for the recent weakness in US non-farm payrolls, the data hasn?t yet been weak enough to justify further easing, as Friday?s slightly better read on Q2 GDP will testify.
Today?s ADP employment report for July is expected to post 120k new jobs, down from 176k in June, while ISM manufacturing is expected to rebound slightly from June?s 49.7 to 50.2.
As long as these data items don?t deteriorate markedly, and there is no evidence so far that they will then the best markets are likely to get is an extension of the low rate guidance into 2015, along with a statement that the Fed remains prepared to act, if economic conditions merit it.
Any further indications of further QE are likely to have to wait until after Friday?s payrolls data and the annual Kansas City Fed central bank symposium at Jackson Hole at the end of August.
EURUSD ? after Monday?s decline the single currency managed to rebound but it still remains below trend line resistance at 1.2390 from the May highs at 1.3285, and the 55 day MA at 1.2455.
We need to see a break below support around the 1.2220/30 area, to retarget the 1.2150 area.
We remain mindful of last week?s bullish weekly candle as well as the support at the 200 month MA at 1.2060, the July lows, which means the risk of a short squeeze towards 1.2600 remains.
GBPUSD ? yesterday?s pullback from the 200 day MA at 1.5745 found support at 1.5625 before a rebound keeping the recent broad range intact.
This region between 1.5740/80 also coincides with June and July highs so is important resistance in order to prevent a break towards 1.5910. There is also trend line support at 1.5450 from the 1.5270 lows and this could conceivably hold any further downside pressure.
Only a close below 1.5240 signals a risk of a return to the July 2010 lows at 1.4950.
EURGBP ? yesterday?s move back above 0.7800 towards last week?s high at 0.7870 wasn?t too much of a surprise given the fairly bullish candle last week. Nonetheless while below the 0.7880 level the risk remains for further losses. Below 0.7755 targets the October 2008 lows at 0.7695, a break of which could well see a test of the 2008 lows at 0.7390. Only a break above resistance at 0.7880 suggests further gains towards the 55 day MA and the 0.8000 level.
USDJPY ? the US dollar continues to find support below the 78.00 level, with cloud support and the May lows 77.60 remaining a key level. As long as this holds the downside, the risk of a rebound remains quite high.
A move above the 79.30 level brings the 80.00 level back into play and then by definition the main resistance at the top of the weekly cloud at 80.45.
Equity market calls
FTSE100 is expected to open 1 point lower at 5,634
DAX is expected to open 5 points higher at 6,777
CAC40 is expected to open 2 points higher at 3,294