Draghi throws the ball back to the politicians
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
Yesterday?s actions by the ECB to commit to unlimited short dated bond buying, in the face of Bundesbank dissent look like they could well buy Europe some additional time to sort out the problems that have plagued the single currency for the last three years.
The ?Outright Monetary Transactions? program (OMT) or ?on Merkel?s tab? as it has been dubbed in some parts will in the short term probably act as a stabilisation factor, as imminent break-up risk of the single currency has been taken off the table.
In effect the ECB has thrown the ball back to the politicians by saying the help is there if you want it, but there is a price to pay for such help. It is now up to the same politicians not to waste it, but given previous experience of European politicians the omens aren?t promising.
The price or ?strict and effective conditionality? is surrender of fiscal sovereignty in return for aid, which neatly passes the baton back to Spanish PM Rajoy to ask for aid.
Any delay in doing so, or arguing about terms and conditions could well see the recent drop in Spanish yields quickly reverse. As we have seen at various stages of this crisis, doing the right thing doesn?t always equate to what politicians think is politically acceptable.
The biggest concern remains the Spanish regions that have steadfastly refused to play along with any conditions for bailout money from Madrid. They will be Rajoy?s biggest problem along with a contracting economy and rising unemployment, when he finally succumbs to the inevitable and asks for help.
Yesterday?s growth downgrade by the OECD to -0.7% wasn?t exactly the good news the UK economy had been hoping for this week, especially in light of the better than expected PMI data seen this week.
The decision yesterday by the Bank of England to keep policy unchanged wasn?t too much of a surprise given that the MPC is likely to want to give the new funding for lending scheme time to percolate through.
Today?s latest industrial and manufacturing production figures for July are expected to show an improvement in output, though after June?s diabolical numbers they would be hard pressed to be any worse.
Expectations are for a rise of 1.6% in both measures only partially reversing the over -2% declines seen in June.
Gfk/BoE inflation expectations could also make uncomfortable reading for the MPC which could see a rise from the 3.7% figure seen previously.
Producer prices for August are also expected to increase as oil prices edge higher from the lows seen in June.
EURUSD ? we saw another shallow dip yesterday, followed by a marginal new high, but so far 1.2650 has capped gains. We continue to remain at risk of a squeeze towards the June highs at 1.2750.
Key trend line support from the 1.2045 lows now lies at 1.2450, while above that we also trend line support at 1.2520 from the 22nd August lows at 1.2435.
The key level on a monthly close remains the 200 month MA at 1.2060, which has acted as support for the single currency since November 2003.
GBPUSD ? the pound continues to hold above trend line support at 1.5845 from the August lows at 1.5490. While above this level the potential for further gains towards 1.6060 remains. Only a break below 1.5840 has the potential to target last week?s lows at 1.5765. The long term trend line support lies at 1.5555 from the 1.5240 lows.
EURGBP ? still range bound here between resistance at 0.7960, which continues to keep a lid on further gains, and support just above the recent lows at 0.7880.
A break below the 0.7880 level has the potential to retarget the 0.7820 area, while on the upside a move above 0.7965 targets a move to 0.8000.
USDJPY ? yesterday saw the US dollar ratchet higher breaking above 78.80, and poking its head above the 79 level.
The 78.10 trend line support from the all-time lows at 75.35 remains a key level and obstacle to further declines.
We need to get back above the 200 day MA at 79.31 to target a return towards the highs last month.
Equity market calls
FTSE100 is expected to open 3 points higher at 5,780
DAX is expected to open 2 points higher at 7,169
CAC40 is expected to open unchanged at 3,510
FTSEMib is expected to open 89 points higher at 15,869