Poor data reinforces easing hopes
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Despite some pretty poor economic data out of Europe and the US yesterday equity markets continue to hold up fairly well, even if the single currency continues to find rallies difficult to sustain.
Perceptions about the prospects of an easing of monetary policy later this week from the European Central Bank, as well as the Bank of England seem to be keeping a floor under equity markets, as investors anticipate their next monetary fix, however the same cannot really be said for the euro, which continues to struggle to hold onto any form of gains.
This economic weakness in Europe was reinforced yesterday as unemployment in the Eurozone increased once more to record euro highs of 11.1%, while manufacturing continued to contract sharply, particularly in Spain and France.
While bond yields in Italy and Spain have eased somewhat there still remains a lot of unanswered questions with respect to last week?s EU Summit agreement, not least Finland and the Netherlands claims that they reserve the right to block bond buying by the bailout funds on the open market.
Given concern about bond buying by the ESM the vote today in the Dutch upper house could well offer some insight into the some of the political divisions starting to open up in the Netherlands surrounding the costs of further fiscal integration.
There is also the small matter of the legal challenges in Germany to the fiscal compact and the ESM which are due to be heard by the German constitutional court on July 10th.
Today the focus is likely to be more on the UK economy and the weakness of UK economic data with the release of construction PMI for June, as well as money supply figures and consumer lending data.
The construction PMI numbers have stubbornly held above the 50 expansion level for most of this year, and once again they look likely to do so slipping back from the 54.4 reading in May to 52.9 in June. The resilience of this PMI data flies in the face of comparable GDP data for the sector which shows that the construction component of GDP is one of the poorest performing parts of the UK economy.
Mortgageapprovals and net consumer credit for May is also expected to remain weak, reflecting the reluctance of consumers to add to their debt burdens in a slowing economy. Mortgage approvals for May are expected to fall back to 50k, from 52k while consumer credit is expected to fall back from £0.3bn to £0.2bn.
It is the M4 money supply figures that are likely to be of particular interest given this week?s Bank of England meeting, given that in the last two months on an annualised basis the figures have been negative.
EURUSD ? the upward momentum seen on Friday looks to be showing signs of waning and a fall back through the lows yesterday at 1.2570 could well be the start of a move back towards the 1.2420 level and last week?s lows.
The main obstacle to a stronger move higher remains above the 1.2750 level which also coincides with a number of other key resistance levels including the 55 day MA at 1.2775 and 50% retracement level of the 1.3285/1.2290 down move at 1.2790.
A move below 1.2420 would be the first step towards the 1.2290 lows this year, while the primary objective remains unchanged at the 2010 post first Greek bailout lows at 1.1880.
GBPUSD ? once again the pound lacked the legs to get above the key resistance on a closing basis at the 200 day MA at 1.5755, topping out at 1.5725 yesterday. While below this key level and the 50% retracement of the 1.6305/1.5270 down move at 1.5785, a fall back towards 1.5580 seems the most likely outcome.
The key support remains at the 1.5480 level, 14th and 15th June lows which we failed to get below last week. Only a break below here retargets the June low at 1.5270.
Only a close beyond 1.5755 the 200 day MA, targets 1.5910, which would be the 61.8% retracement of the move mentioned earlier.
EURGBP ? pullbacks here have continued to remain below the 55 day MA at 0.8078 and trend line resistance from the highs this year at 0.8505 at 0.8090. As long as any pullbacks stay below then further euro losses are the preferred scenario, otherwise we?re looking at resistance at the 0.8150 area.
The area below the 0.8000 level seems to be offering quite a bit of support at the moment; however the key level remains the 0.7950 area.
Once below 0.7950 we could well see a move towards 0.7845 and the November 2008 lows.
USDJPY ? the choppy range continues to play out within the cloud with the top at 80.45 and the support above the 200 day MA at 78.80. We also have trend line support at 79.20/30 from the 4th June lows at 78.00.
To reiterate we need a weekly close above 80.50 to reassure about further upside.
Equity market calls
FTSE100 is expected to open 9 points higher at 5,650
DAX is expected to open 17 points higher at 6,513
CAC40 is expected to open 15 points higher at 3,255
FTSEMib is expected to open 73 points higher at 14,382