Stimulus hopes rise after FOMC
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
The surprisingly dovish nature of last night?s FOMC minutes has raised expectations that the Fed could act with further stimulus measures as early as its September meeting. Investors paid particular attention to the sentence ?many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.?
The extremely dovish tone of these comments suggest that the committee is leaning much more towards either more bond buys, or much looser fiscal or low rate guidance language.
The next focus is therefore likely to shift to Fed Chairman Bernanke?s speech at Jackson Hole on 31st August at the annual central bank symposium, where the tone of his remarks will be closely monitored, for further clues as to the Fed?s thinking.
It is worth noting that since the Fed meeting in question, markets and policymakers have seen a much better than expected July jobs report and retail sales numbers, which would not have been known about at the time of the meeting. By the time the Fed meets again in September the August payrolls report will be known, as will the next ISM manufacturing number, and the numbers here could well determine which way the Fed goes.
Later today the latest jobless claims numbers are expected to remain around the same level as last week, around the 365k mark.
In China speculation about additional stimulus also returned after HSBC Manufacturing PMI for August deteriorated sharply to 47.8 from 49.3, a 9 month low.
Meanwhile back in Europe the question of whether Greece will be able to get agreement to an easing, or extension of its bailout conditions remains unresolved, with German Chancellor Angela Merkel ruling out a decision until after the troika report is delivered in September. Comments from Eurogroup head Jean Claude Juncker suggested that the tone remained resolute and that Greece remained in the last chance saloon.
It still seems unlikely at this juncture that Greece will get any more leeway, though as with most things European, we might get a shabby compromise, the only problem is we may have to wait two months to get it.
Of a more pressing concern remains the lack of growth in Europe, Germany notwithstanding who are expected to see Q2 growth of 0.3% confirmed in figures due out this morning.
Even so current economic activity remains on a downward path, with the latest manufacturing and services PMI data for both Germany and France due to show further contraction for August.
In the manufacturing sector activity is expected to be painfully weak with figures of 43.5 for Germany and 43.7 for France, both well into contraction territory. Services activity is expected to stagnate at 50 for both.
The broader Eurozone PMI measure is also expected to show contraction with 44.2 for manufacturing and 47.7 for services.
EURUSD ? the single currency has so far managed to sustain its gains above the 1.2400 level dipping back to 1.2435, which suggests we are likely to see a test towards the 1.2550 level which is trend line resistance from the 21st May highs.
We could even go back as far as the 200 day MA at 1.2625.
Having acted as a cap for such a long time we should 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 ? yesterday?s move higher appears to be bringing us closer to 1.5910, the 61.8% of the 1.6305/1.5270 down move. For this to happen we need to hold above 1.5780 the 50% level as well as the 200 day MA at 1.5720. A break above 1.5910 brings the 1.6000 level back into play.
This week?s low at 1.5675 is also likely to act as support.
The long term trend line support lies at 1.5520 from the 1.5240 lows.
EURGBP ? while below the 55 day MA at 0.7940 and trend line resistance at 0.7920 from the February highs at 0.8505, the trend remains for a lower euro.
Having overcome the 0.7880 area earlier this week 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 ? it was good while it lasted but the break back below the 200 day MA at 79.20 saw the US dollar slide sharply as US yields plunged on the prospect of possible Fed easing measures as soon as next month, after the release of the latest Fed minutes.
The move below 78.80 now brings with it the prospect of a move back to the range and August lows at 77.80. The key weekly cloud support remains at 77.30.
We would need to see a move back above 78.80 to stabilise.
Equity market calls
FTSE100 is expected to open 39 points higher at 5,803
DAX is expected to open 60 points higher at 7,078
CAC40 is expected to open 25 points higher at 3,487
FTSEMib is expected to open 134 points higher at 15,295