Germany denies bailout fund bond plans, while UK awaits BOE minutes
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
In Europe there appears to be some uncertainty about a proposal by Italy that the EU rescue funds of the EFSF and ESM should start buying the bonds of distressed EU countries, in place of the ECB.
There certainly needs to be some plan since LCH Clearnet last night raised the margins on Spanish bonds, making it more expensive to trade in them. There certainly needs to be some plan but whether this is it remains to be seen.
Reports that Germany is in favour of the proposals was flatly denied by German officials who stated that this was not true, and that the ideas were one of many proposals due to be discussed at the forthcoming EU finance ministers meeting on 21st and 22nd June.
If agreement is reached on such a measure this would help drive the currently elevated bond yields of the affected countries lower and ease the pressure and thus ease borrowing costs. The EFSF already has the power to do this, as it was given it last year, but any decision to do so is subject to strict conditionality. There is also the subject of where the EFSF and ESM, which doesn?t exist yet, intend to raise the amount of money needed to carry out this plan, if it goes ahead.
In the UK the bigger than expected fall in CPI inflation yesterday has raised expectations that the Bank of England could well be minded to embark on further easing measures when it next meets in July.
There was some surprise that the bank didn?t ease at its June meeting, given how poor recent economic data has been, but it was probably felt that the MPC needed to see more evidence that price pressures were continuing to ease.
The recent sharp falls in oil prices has certainly helped the CPI numbers in that regard, and today?s Bank of England minutes are expected to show how finely balanced this months decision to leave policy unchanged was.
Given last week?s comments by the Bank Governor at the Mansion House dinner last week the expectation is that the decision earlier this month may well have been quite close. Today?s publication of the latest minutes will show us how close, and whether the odds of further easing, on top of the recent policy initiatives last week, have increased. The voting patterns will be of particular interest given that only David Miles voted for more QE the last time. Did others join him in voting for more QE and did Adam Posen change his vote back after admitting that he might have erred, in changing his position earlier this year.
At around the same time the latest ILO unemployment numbers for April are expected to come in unchanged at 8.2% while May jobless claims are expected to decline further by 3.7k. Three month average earnings, on the other hand, are expected to nudge up from 0.6% to 0.8%, a slight relief but no comfort to consumers weighed down by an inflation rate over three times higher.
EURUSD ? the single currency is having trouble breaking below the trend line support at 1.2550 from the lows this year at 1.2290. Until we break below here the euro will remain susceptible to short covering. The current rebound could take us to 1.2820, but until the euro is able to get back above these levels the focus remains to the downside.
A break of the trend line support from the 1.2290 lows at 1.2545 is likely to open up a move back towards the next support at 1.2430/40.
The primary objective still remains the 2010 post first Greek bailout lows at 1.1880, but we could see a bit of a short squeeze first.
GBPUSD ? the pound had a go at pushing through both sides of the range yesterday, finding support just above the 1.5600 area, while also failing to close above the 200 day MA at 1.5755.
These are the two key levels that will determine the next move in the cable.
A slide back below 1.5620 could well see the pound slide back towards the 1.5470/80 area.
Only a break above 1.5755, the 200 day MA and through 1.5780 targets 1.5910 which would be the 61.8% retracement of the same move. Support now lies at the 1.5610/20 area.
The key support remains between 1.5230 and 1.5260 and lows for the last nine months which if broken could well see a sell-off on a break of this level towards 1.4950.
EURGBP ? still in the range here after yesterday?s rebound from the 0.8020 level while the 55 day MA continues to cap on the topside.
The key resistance remains at this months highs at 0.8150 and is the main obstacle to a move towards 0.8200, the trend line resistance from the 0.8830 highs last November.
On the downside there is trend line support from the recent lows at 0.7950, at the 0.8000 level which continues tocould limit the downside here.
If we break below the recent lows at 0.7950 then we could well be set for the move towards 0.7845 and the November 2008 lows.
USDJPY ? not much to add here as the key levels continue to lie either side of the cloud extremities at 80.40 on the upside and 77.90 on the downside. Hopefully today?s decision about further Fed QE will give some direction.
The US dollar continues to hold above the 200 day MA for now which remains a positive sign, but a close back below shifts the focus to a much more negative stance.
Only a weekly close above the 80.42 cloud resistance line would suggest a stabilisation in the dollar towards 82.00.
Equity market calls
FTSE100 is expected to open 8 points lower at 5,578
DAX is expected to open 11 points lower at 6,352
CAC40 is expected to open 8 points lower at 3,110
FTSEMib is expected to open 30 points lower at 13,415