Sunday, February 1, 2009

5.1 Confidence crumbles as week progresses

European markets started the week on the up. The rally was sparked off by UK banking giant Barclays’ open letter which said it had made profits of more than £5.3B last year and would not have to raise fresh capital. The good vibes swept over the Channel when BNP Paribas made equally reassuring noises and ING revealed a package of support measures courtesy of the Dutch government. This growth in risk appetite led to a strengthening of the euro against the dollar and EUR/USD got a further boost from the release of positive data from the other side of the pond. US Existing Home Sales came in better than expected as falling house prices tempted buyers and investor confidence rose accordingly. EUR tested resistance at 1.33 after German business confidence was surveyed better than expected. The rise of the euro then faltered as US consumer confidence slipped to a record low. German consumer confidence came in better than expected on Wednesday and the euro climbed to test $1.33 once more. The pair started heading south in earnest after the FOMC’s monetary policy statement added little to last month’s Fed statement. Thursday’s raft of disappointing US data did little to make investor’s less risk averse and the greenback strengthened as durable goods orders, new home sales and unemployment change all disappointed. It was downhill all the way from there as Friday saw euro-zone unemployment hit two-year highs of 8%, and with the EZ inflation rate coming in at its lowest since 1999, pressure is mounting for the ECB to cut interest rates. However, ECB president Jean-Claude Trichet has made it clear that they planned to hold out at 2.00% until their March meeting. US GDP rounded off a recession-racked week by coming in at -3.8%. Although this was not as bad as many had predicted, it still marked the steepest decline since 1982 and the euro fell to test support at 1.28 and closed the week at 1.2804

Barclays bank’s reassuring open letter kicked off a week of steady strengthening for sterling, despite worries that the UK government’s £2.3B bail-out for car makers would prove insufficient. In a departure from the recent norm, UK data came in better than expected except for Friday morning’s consumer confidence which slumped close to all-time lows. The pound’s rise met resistance at 1.4350, and it fell back from this level after the FOMC’s monetary policy statement. It went on to range within 1.41 and 1.4350 before making an upside breakout at the end of the week’s trading to close just below 1.45 at 1.4491. All eyes will be on the Bank of England, which looks set to cut interest rates by at least 0.5% next Thursday.

It’s a big week for economic data with no less than 3 central banks making interest rate announcements. On Tuesday, Reserve Bank of Australia look set to cut by up to 1% to 3.35% a 45-year low. The Bank of England steps up first on Thursday and economists expect a cut of at least 50 bps to 1%. The ECB will make its announcement 45 minutes later on Thursday, with the bank widely expected to hold at 2% until March. Don’t forget that the follow-up press conference is often the big market mover.
US data includes the Purchasing Managers Index (PMI), with manufacturing numbers on Monday and non-manufacturing on Wednesday. There’s more housing data on Tuesday, with Pending Home sales. Wednesday includes the ADP jobs stats which will guide expectations for the big daddy of data releases: Friday’s Non-Farm Payrolls and the US unemployment rate.

The UK’s PMI numbers are also out this week, with manufacturing on Monday, construction on Tuesday and services on Wednesday. The action continues after Thursday’s MPC interest rate announcement with Producer Prices and Manufacturing Production in the mix on Friday.
The euro-zone is also releasing its PMI numbers on Monday (manufacturing) and Wednesday (services). German Retail Sales are out on Tuesday, with Retail Sales for the euro-zone as a whole are out on Wednesday. Friday rounds the week off for the euro with German Industrial Production.

We see more downside action for EUR/USD with resistance at 1.31 and support at 1.25. GBP/USD should meet resistance at 1.4600 and support at 1.38.

USD/JPY will most likely range within 87.00 and 93.00.

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