German court expected to approve ESM
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
While it would be tempting to assume that yesterday?s US dollar decline was inspired by the threat by Moody?s to cut the US rating, the reality is it has more to do with an expectation of additional easing measures tomorrow by the Fed and an expectation that the German constitutional court will today wave through its approval for the new bailout mechanism the ESM.
What is unknown is the conditionality it will insist upon as part of its approval. There is widespread uncertainty as to what these conditions might be, but they will no doubt serve to preserve the principles of the so called ?basiclaw?, by limiting Germany?s liability to a fixed sum, as well as imposing strict conditions to any additional actions that may impinge on Germany?s budgetary independence. On the margins the judges could insist on a referendum, but that seems unlikely and would be hugely contentious.
Also today polling starts with the Dutch elections which came about as a result of the refusal to sign up to the fiscal compact. While the final vote is not likely to be known until Monday the likely outcome is set to be some form of coalition government which could well make future decision making in one of Northern Europe?s key heartlands much more difficult when it comes to making decisions that affect Europe.
EU President Barroso will also outline an early draft of European Banking Union proposals with the ECB and the European Banking Authority (EBA) at the heart of them. These reforms which will need to be ratified by all 27 member countries have the potential to be politically contentious with Germany as well as the UK opposed to some aspects of them.
Other non euro countries including Poland and the Czech Republic also have reservations about the extent of oversight of any new plans, and the involvement of the EBA and its potential reach in terms of banking regulation.
Against this backdrop economic data is expected to continue to disappoint with the latest Eurozone industrial production data for July expected to show a year on year slide of 3.3%, with no change on a monthly basis. Italian industrial production is also set to show a decline of 0.5%.
In the UK the latest ILO unemployment numbers for the three months to July are expected to remain at 8%, with jobless claims expected to remain unchanged at 0k, further compounding the mystery of a sinking economy and falling unemployment. Yesterday?s July trade balance numbers do point to an improvement in Q3 which is encouraging with a significant rise on exports to non EU countries.
Even so economic conditions are set to remain difficult with the squeeze on incomes expected to continue with average weekly earnings set to remain stuck at 1.6%, well below the current rate of inflation.
EURUSD ? the single currency closed above its 200 day MA for the first time since 28th October last year yesterday suggesting that we could see a move towards the 1.3000 level in the near term. Caution is required though as the last time it did this it only managed to sustain the gains before sliding sharply. The close above trend line resistance at 1.2850 is not conclusive and therefore remains susceptible to disappointment and a slide back towards 1.2650.
Key trend line support from the 1.2045 lows now lies at quite some way back at1.2495, while above that we also trend line support at 1.2535 from the 22nd August lows at 1.2435.
GBPUSD ? the pound continues to push on towards the 1.6100 level and ultimately downtrend line resistance at 1.6175 from the 2011 high at 1.6745.
Trend line support comes in at 1.5890 from the August lows at 1.5490. Only a break below 1.5860 has the potential to target 28th August lows at 1.5755. The long term trend line support lies at 1.5575 from the 1.5240 lows.
EURGBP ? the single currency continues to run into selling pressure at 0.8010/20 area keeping alive the likelihood of a pullback towards the 0.7950 level. As long as any pullbacks hold above the 0.7950 level a push towards 0.8100 can still happen.
Below the 0.7950 level suggests a move towards the 0.7880 level.
A break below the 0.7880 level has the potential to retarget the 0.7820 area.
USDJPY ? the US dollar continues to come under pressure and near the June lows at 77.65 which would be the last obstacle to a move towards the all-time lows at 75.35.
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 9 points lower at 5,783
DAX is expected to open 20 points higher at 7,330
CAC40 is expected to open 2 points lower at 3,535
FTSEMib is expected to open unchanged at 16,227