Markets await Bank of England, ECB and Italian and Spanish bond auctions
Throughout most of fourth quarter UK PMI data has always seemed to flatter to deceive when it comes to the UK manufacturing and industrial production data which has been less than convincing. This morning’s release of November data is not expected to be any different with expectations fairly low on both the monthly and the annualised measures.
Industrial production is expected to slip 2.2% annually, but improve from October’s 0.7% slide to post a figure of -0.1%.
Manufacturing production is also expected to similarly improve on the monthly measure from -0.7% in October to -0.2%, while the annualised measure is expected to slide from positive to negative territory of -0.5%.
If the numbers are even worse than predicted it will certainly increase the pressure on the Bank of England to look at further easing measures in the coming months.
Today’s rate decision will probably be too soon for the MPC to consider such measures in the short term, given recent comments from various policymakers about not wanting to pre-commit to further easing in light of the uncertainty in Europe.
The likely outcome will be a “hold” on rates and a “hold” on the current £275bn of asset purchases.
The committee will also be looking for evidence that inflation is starting to come down as last years VAT rise drops out of the figures, this month. They will also be looking towards the latest quarterly inflation report and the Q4 GDP numbers, both out later this month.
The committee received good news on the inflation front yesterday with the announcement by EDF Energy that they would be cutting gas prices by 5% from February 7th, which should also take out some of the sting from recent price rises.
The news that the German economy, the powerhouse of Europe most likely contracted by 0.25% in Q4 was a cold reminder, if any were needed, of the problems playing out throughout Europe in the last few months.
With inflationary pressures also showing some signs of slowing down the pressure is likely to increase on the ECB to look at further measures to ease monetary policy at its latest rate meeting today.
If today’s French and German CPI data for December confirm that these price pressures are continuing to abate then the pressure on the ECB to do more to aid with the crisis in Europe will grow ever stronger. German CPI is expected to come in at 2.4%, while French CPI is expected to slip back to 2.5%.
If today’s Eurozone industrial production figures for November follow similar weakness to last weeks European economic data the pressure to act will be ratcheted up further. A slide of 0.3% is expected a decline from October’s 0.1%.
Irrespective of the data released today it would be a surprise if ECB President Mario Draghi announced further easing of policy so soon after consecutive rate cuts, as well as last months launch of the 3 year LTRO’s.
It remains more likely that the Bank will downgrade their growth forecasts again for 2012, while giving an update on the success of the LTRO’s while the bank accumulates overnight deposits at record levels.
Draghi may give further clues at the press conference today about the timing of the next rate cut, which could well come as soon as February, especially if economic conditions continue to deteriorate.
Yesterday’s solid demand for Germany’s 5 year Bobl is unlikely to translate across to today’s Italian and Spanish bond auctions which will be closely monitored for evidence of lower yields and increased demand. Spain is looking to sell €5bn of 2015 and 2016 bonds while Italy is looking to sell €12bn of 6 and 12 month bills.
US retail sales for December aren’t expected to improve markedly from November’s disappointing numbers despite the run up to Christmas, with expectations of a rise of 0.3%, up only slightly from the previous 0.2%.
EURUSD – the euro made a marginal new 16 month low yesterday at 1.2660, but lacked the momentum to follow through, reinforcing the support around this key area.
While this area holds the risk of a rebound back towards the 1.2850/70 area remains a possibility.
The risk remains for the move towards the August 2010 lows at 1.2590 which also equates to a 76.4% retracement of the up move from the 2010 lows at 1.1880 to last years highs at 1.4940. It would need a break below 1.2480 and the July 2010 lows to open up the 1.2000 level.
If the 1.2850/70 area were to break any overspill should be contained by the 1.3080 area.
GBPUSD – the pound had a day to forget yesterday breaking below the December lows at 1.5360 as well as the trend line support at 1.5375 from the 2011 lows at 1.5270.
The 1.5270 lows in October remain the last barrier to a test of the 1.5190 61.8% retracement of the 1.4230/1.6745 up move. There is also support at 1.5125, the July 2010 lows, a break of which targets 1.4980.
The pound needs to get back above the 1.5570 area to retarget the 55 day MA at 1.5740.
EURGBP – the single currency has thus far found resistance at the 0.8300/10 area and while it contains the rally further downside remains the preferred outcome. Only a break above argues for a deeper correction re-targeting 0.8370.
The September 2010 lows at 0.8200/05 remain the key obstacle to further declines towards the 2010 lows at 0.8065.
This should continue to provide support initially, and we could well see range trading between these levels for the next few days.
USDJPY – maintaining the status quo here with support around the 76.50 area and resistance at a confluence of the 55 day MA at 77.50 and trend line resistance at 77.80 from the 2007 highs at 124.15.
The key support remains around the November 2011 lows at 76.50 which prompted last week’s pullback. Only a move and close below 76.50 opens up the all-time lows at 75.30.
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