Growth a concern as euro pushes to „dangerously high“ levels
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
It appears that European policymakers have woken up to the fact that the recent rebound in the euro may be doing more harm than good after outgoing Eurogroup chief and Luxembourg Prime Minister Juncker stated that the single currency was reaching ?dangerously high? levels.
Unfortunately this appears to be the price for the recent decline in Spanish and Italian bond yields, which have been highly correlated with the euro as pressure on the ability of the Spanish and Italian governments to sell their bonds has subsided. If yields continue to fall then we could well see further euro gains towards $1.40 which would ratchet up the problems once again in the weaker economies as they struggle to rebalance.
Concerns remain about growth in the euro area after Germany posted a slightly worse than expected annualised GDP number for 2012, which came in at 0.7%. It also appears that growth is a concern for the World Bank as the organisation downgraded its forecasts for 2013 from 3% to 2.4%, with advanced economies only growing at 1.5%.
This weak number as well as fairly low inflationary pressures probably prompted the call by Spanish Prime Minister Mariano Rajoy yesterday for measures to stimulate growth in the euro area, from Germany in particular. The Spanish PM, already under pressure at home, is hoping that the current calm in the markets will remain as he resists calls to ask for a sovereign bailout against a backdrop of a shrinking economy and rising unemployment.
Eurozone CPI for December is expected to come in at 2.2%, while it is hoped that new car registrations in December start to show an improvement on the shocker of a number seen in November which showed a 10.3% decline, a 19 year low.
Across the pond in the US the latest CPI numbers are expected to reinforce Fed Chairman Ben Bernanke?s relaxed attitude towards price pressures earlier this week. The main concerns remain around the manufacturing sector after this week?s miss on Empire Manufacturing for the second month in a row.
Industrial production is expected to slip in December to 0.3% from 1.1% in November while later on the latest Fed Beige Book which will give updates on economic activity in the various Fed regions. It is to be hoped that the shenanigans in the lead up to the fiscal cliff didn?t put too much of a dampener on activity in the last month of the calendar year.
EURUSD ? the 1.3400 appears to be acting as a short term cap for now.
The key level remains at the 1.3500 level which is the 200 week MA as well as the 50% retracement of the 1.4940/1.2045 down move. A move through 1.3500 targets 1.3835, the 61.8% measure. Yesterday?s slide back below 1.3300 could well signal a slide back towards the 1.3170 area.
The long term support line from the 1.2045 lows now at 1.3010 remains the key level on the downside.
GBPUSD ? cable continues to chop between resistance near the 1.6180 level and support just above 1.6000. To retarget the resistance at 1.6310 the cable needs to get above 1.6180. A break below the 1.6000 level is needed to target major trend line support now at 1.5970 from the 1.5270 lows, the 200 day MA at 1.5900, as well as 1.5660.
EURGBP ? yesterday?s fall in the euro could well signal a short term pullback on the daily charts after yesterday?s bearish engulfing day and tweezers top on the daily charts. As such a break below 0.8270 could well signal a move towards 0.8225 initially towards the long term trend line support at 0.8090 from the 0.7755 lows. This week high at 0.8325 is now resistance for a move towards the 0.8420 level, which is a 50% retracement of the down move from 0.9085 to the lows at 0.7755.
USDJPY ? having stalled just shy of the 90 level the recent pullback could well drop as far as the 87.50 level, and even fall back as far as the 86.80 area. The long term target stays at the 94.00 level; however current momentum continues to look rather stretched, and we could now see some sideways price action between 85 and 90 over the next few weeks.
Equity market calls
FTSE100 is expected to open 2 points lower at 6,115
DAX is expected to open 4 points higher at 7,680
CAC40 is expected to open 11 points higher at 3,708