Europe set for flat open ahead of Eurogroup meeting
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
While Europe?s markets enjoyed a rebound on Friday the fact that they finished the week lower, having given up most of this year?s gains, suggests that investor sentiment remains remarkably fragile despite some evidence of a recovery in German and Chinese economic activity last week. In the absence of a lot of Asia?s main markets today, due to seasonal holidays, Europe?s markets look set for a quiet open.
It appears that the ever present threat of political risk in Europe is once again tempering investor enthusiasm with the well documented problems in Spain and Italy once again returning to the forefront of investor attention, though the rising value of the single currency has also started to invite quite a bit of discussion as well.
While EU leaders in a rare share of unity may have agreed in principle to a reduction in the next EU budget, subject to parliamentary approval, the agreement has also sharply highlighted differences in priorities with respect to the relationship between Germany and France, and the divisions between them with respect to how to deal with Europe?s current problems.
This week?s Eurogroup finance ministers meeting is likely to focus on the recent rise in the value of the single currency after a difference of opinion between Germany and France last week in the wake of Japan?s aggressive stance in weakening the value of the yen.
In the wake of Friday?s big write downs at Peugeot, and last week?s weak French PMI data French politicians have been at pains to suggest that the rise in the euro is not helping, however Germany and the ECB have dismissed this argument saying that the rate of the euro appears to be appropriate for the moment.
ECB President Draghi was at pains to suggest that if the currency rose too high it might have an effect on inflationary pressures, and those comments have taken some of the edge of the recent rise. Even so it is a subject that is likely to be discussed at length this week ahead of the G20 meeting which is due to start on Friday.
EU finance ministers are also likely to discuss the protracted nature of Cyprus?s bailout as well as the continuing unrest in Greece on its fiscal adjustment program, while concerns about the direction of the Italian opinion polls ahead of the election in two weeks? time are causing a resumption of uncertainty in bond markets.
Italian bond yields have started to edge back up again with 10 year yields rising back above 4.5% last week.
It is also likely to be an important week for the pound with the latest inflation numbers due tomorrow, with expectations that consumer prices may start to edge higher again, while the latest quarterly inflation report on Wednesday is likely to point to continuing sticky inflation as well as a weak growth outlook.
EURUSD ? a bearish weekly reversal following on from the daily reversal seen last Monday suggests the risk of further declines in the single currency this week.
Initial support is likely to come in around the January lows at 1.3250, while the long term trend line support at 1.3150 from the 1.2045 lows is the major line in the sand for this uptrend. Any rebound is likely to find resistance at 1.3490, and behind that at 1.3600.
GBPUSD ? the pound continues to hold above trend line support at 1.5645 from the 1.3500 lows in 2009, and last week?s bullish reversal suggests we could well see a rebound back towards the 200 day MA at 1.5910.
In the event we see a break below our trend line support then we could well see a retest of the 2 year range lows at 1.5270 on a break below 1.5600.
The pound needs to close back beyond the 200 day MA at 1.5910 to stabilise and diminish the downside risk.
EURGBP ? the failure to close above the 200 week MA at 0.8525 and a bearish weekly reversal suggests the potential for a pullback towards 0.8425 initially. A push below 0.8420 has the potential to target trend line support at 0.8125 from the lows at 0.7755.
If we close above 0.8525 then we could well see a retest back towards 0.8580 initially and then the highs at 0.8715.
USDJPY ? we may have a short term top at 94.00 the 38.2% of the down move from the 2007 highs at 124.15 to 75.30. We also have resistance at 95.00 which is the 2010 highs.
Only below the 90.30 level argues for a deeper correction towards key support at 87.50.
Equity market calls
FTSE100 is expected to open unchanged at 6,264
DAX is expected to open 3 points lower at 7,649
CAC40 is expected to open unchanged at 3,649