German ZEW expected to show an improvement
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
After a subdued European session yesterday saw modest gains investors will be turning their attention back to the state of the German economy, after last week?s disappointing annualised GDP numbers.
While we saw last week that the German economy probably contracted sharply in Q4, yesterday?s comments from Bundesbank chief Jens Weidmann appeared to suggest that a recovery would take place in Q1. He gave no indication of suggesting that the current growth forecast of 0.4% could be revised up though.
Today?s January German ZEW survey is likely to give clues as to investor sentiment, however it would be a mistake to place too much stock in it given it is largely a reflection of market trading conditions which have been relatively benign of late. It would therefore not be too much of a surprise to see the economic sentiment index rise from December?s 6.9, with expectations of a rise to 12.2.
The more benign environment in Europe has seen one of last year?s relative safe havens, the UK come under more scrutiny with respect to its fiscal affairs, and given the recent sharp declines in the pound in the last few days today?s public finance numbers for December aren?t expected to paint a pretty picture.
With most of the economic data from December so far painting a picture of contraction for Q4, the expectation is that, while we could see an improvement on the November numbers, Decembers borrowing is expected to come in at £13bn, above last year?s level and cause the Chancellor to fall further behind his borrowing target for the current tax year.
As expected the Bank of Japan moved to a policy of open ended monetary easing and adopted a 2% inflation target, double its existing target. The Bank said it would start its program from January 2014 after the current program ends and would look at buying short term government debt to the tune of $146bn a month. This delay in implementation could see some initial profit taking in yen short positions after the declines of recent weeks, but in the long termer is unlikely to change the direction of travel of a weaker yen.
The latest Eurogroup meeting continues in Brussels after the appointment of Dutch finance minister Dijesselbloem to replace Juncker. Finance ministers are also said to have approved the latest aid instalments to Greece in a seal of approval to the current progress in the beleaguered country, and are also likely to back the framework for the implementation of some form of financial transaction tax.
EURUSD ? the single currency appears to be forming a potential double top formation at the 1.3400 level. Only a move towards the 1.3500 level negates this scenario, a break of which targets 1.3835, the 61.8% retracement of the 1.4940/1.2045 down move. A break below 1.3250 where we have the base suggests a test towards the long term support line from the 1.2045 lows now at 1.3035 which remains the key level on the downside.
GBPUSD ? even though we pushed below the November lows we managed to hold above the 50% retracement of the 1.5270/1.6380 up move at 1.5815. A break would nevertheless probably signal further losses towards 1.5680. The 200 day MA at 1.5910 should now act as resistance. The pound needs to push back through 1.6050 to retarget 1.6130.
EURGBP ? the 0.8420 50% level has contained the upside so far, with a break targeting the 0.8576 61.8% retracement level of the down move from 0.9085 to the lows at 0.7755. The 0.8325 level should now act as support on any pullbacks. Long term trend line support at 0.8100 comes in from the 0.7755 lows.
USDJPY ? the US dollar slipped back in a classic sell the news scenario after the decision by the Bank of Japan this morning. While we may see some initial weakness in the US dollar, due to the delay in implementation of the new policy the overall scenario remains for a move higher beyond 90.30 towards 94.00
Key support now lies at Thursday?s low at 87.80, with a break below 87.50 targeting 85.00.
The long term target stays at the 94.00 level, ahead of tomorrow?s BoJ meeting.
Equity market calls
FTSE100 is expected to open unchanged at 6,181
DAX is expected to open 7 points lower at 7,742
CAC40 is expected to open 3 points lower at 3,760