European markets set to open lower ahead of FOMC minutes
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
The absence of any bad news out of Europe continues to drive stocks and the single currency higher in a classic short squeeze, with the S&P500 briefly hitting its highest levels in four years before sharply reversing yesterday.
This key reversal day on both US indices could well be a significant reversal pattern, however only time will tell, with the single currency also hitting two month highs on market speculation that EU policymakers are finally getting their act together and formulating a plan to cap peripheral bond yields, and limit stress in government bond markets.
The decline in 10 year Spanish bond yields, which has closely correlated inversely to the movements in the single currency, has seen yields close to their lowest levels since early June. For the decline in yields to accelerate we would need to see a break below 6%, which in turn could well send the euro even higher.
With talk of possible concessions for Greece and its bailout terms doing the rounds, Greek Prime Minister Samaras begins a series of meetings starting with Eurogroup head Juncker in Athens today, followed by Germany?s Merkel tomorrow in Berlin and then France?s Hollande later in the week.
Yesterday?s slide in the US dollar could well be in part attributable to the release later today of the latest minutes of the most recent FOMC meeting. This slide came despite comments yesterday from FOMC member and Fed hawk Lockhart, who articulated that there was a risk that monetary policy is being employed too aggressively ?and without effect to address economic problems that can be resolved only by fiscal reform?.
Markets generally take a rather relaxed view of Lockhart?s views given that he is a lone voice on the committee, however there continues to be reluctance on the part of the Fed to be too overt about the likelihood of further easing.
In any case their reticence appears to have done the trick, as markets have gone higher in any case, without the central bank having to spend an extra dime.
The likelihood is that the minutes are likely to highlight the general uncertainty amongst committee members about what to do next, if anything.
Bernanke has always said the Fed remains to act if necessary, the problem he?s got is that according to the stock market it isn?t necessary. The S&P500 hit four year highs yesterday and the economic data simply does not warrant it, either now or probably in the next month, which means that any further easing is very unlikely to happen before the US November elections.
In any case US bond markets appear to have made up their mind about further easing as the recent rise in yields will testify.
Given this price action the Fed is likely to do nothing and all the minutes will do is inevitably shift the focus towards Jackson Hole, and the central bank symposium next week.
EURUSD ? after breaking through the 55 day MA and the 1.2400 level the single currency triggered a raft of stops that has the potential to take it back to 1.2560 initially, and even as far as the 200 day MA at 1.2630. Having acted as a cap for such a long time expect to find support around the 1.2410/20 area, but if we slip below here expect to see a move back towards primary trend line support at 1.2310, from the 1.2045 lows.
The bullish weekly candle from a few weeks ago looks like it could well be playing out quite nicely with the key level on a monthly close remaining at the 200 month MA at 1.2060, the July lows.
GBPUSD ? the cable continues to push higher, once again closing above the 200 day MA at 1.5715 and the close right on the 1.5780 level suggests we could well see further gains.
The 1.5780 level is 50% of the 1.6305/1.5270 down move and we could well see a potential move to 1.5910, the 61.8% level. Intraday support can be found around the lows this week at 1.5680.
A break below the trend line support at 1.5515 from the 1.5240 lows suggests a move back to 1.5240.
Only a close below 1.5240 signals a risk of a return to the July 2010 lows at 1.4950.
EURGBP ? yesterday?s break above the 0.7880 area has seen stops triggered sending the euro back above the 0.7900 area, which looks likely to see it test the 55 day MA at 0.7940 and trend line resistance at the same level from the February highs at 0.8505..
Having overcome the 0.7880 area any pullbacks look likely to find support around here, while below support remains around the 0.7820 area.
This area remains the key barrier to a test of the downside and previous lows at 0.7755.
USDJPY ? the 200 day MA at 79.20 appears to be acting as support for now, however a break below could well retarget a move back towards 78.80. While above 78.80 a move towards the weekly cloud resistance at 80.40 is the preferred scenario.
Below 78.80 reopens the downside and a return to the range lows and cloud support at 77.30 and the May lows at 77.60 remain a key level.
Equity market calls
FTSE100 is expected to open 40 points lower at 5,818
DAX is expected to open 42 points lower at 7,047
CAC40 is expected to open 22 points lower at 3,491
FTSEMib is expected to open 91 points lower at 15,239