Risk appetite remains cautious in wake of Bernanke and Obama speeches
Fed Chairman Ben Bernanke yesterday gave his best impression yet of a poker player, playing his cards close to his chest, as he reiterated his comments at Jackson Hole at a speech last night to an audience in Minnesota.
By simply reiterating that the Fed had a "range of tools that could be used to provide additional monetary stimulus" and would be discussing them later this month, the markets appear to be coming to the realisation that the Fed could well be running out of bullets in its fight to boost the US economy.
President Obama’s eagerly awaited jobs speech outlined a jobs package of $447bn to try and kick start the US economy and almost dared the Republican controlled Congress to block it, by warning them that it was time to “stop the political circus and actually to do something to help the economy”.
With $240bn worth of tax cuts included in the package the President the said he would be following it up on September 19th with a more ambitious deficit reduction package which would include more tax rises and adjustments to Medicare and Medicaid. The President has now thrown the political onus back onto the Republicans to help pass the bill or blame them if it stalls in Congress.
The decision yesterday by the Bank of England to hold rates and keep the asset purchase program unchanged should have been no surprise given the reasons outlined yesterday, and this saw the pound rally quite strongly on its trade weighted index.
It will however be interesting to see who else joins Adam Posen in the QE corner when the minutes are released in a couple of week’s time.
Today’s release of UK producer prices for August could well see a month on month decline of input prices of 1.5% bringing the annualised rate down from 18.5% to 16.8%. Output prices which are much lower on an annualised basis are expected to remain unchanged at 5.9%.
It would however be a mistake to expect inflationary pressures to start to slip back as we look ahead to next weeks CPI numbers, which are expected to rise on the back of utility price rises for electricity and gas bills.
Europe continues to hog the limelight in the wake of yesterday’s comments by Trichet that there was little likelihood of any further fiscal tightening in the foreseeable future, given the troubling economic environment.
Going as it did hand in hand with a growth downgrade the outlook for Europe gets darker by the day, something the G7 meeting starting today in Marseille will not be able to solve in a hurry.
Given that the rhetoric from German and Dutch politicians has also hardened towards Greece and any further bailout money it is becoming increasingly apparent that patience is starting to wear a little thin.
In Italy the latest release of Italian Q2 GDP is expected to show no change from the previous 0.3%, which while not bad, needs to be a lot higher if the country is to make serious inroads into its debt pile.
EURUSD – yesterday saw the break of trend line support from the 1.1880 lows in 2010 at 1.3975 and a daily close below the 200 day MA at 1.4024. If we can now confirm this break with a close below the 200 week MA today, also at 1.4024 then we could well mark the turn for a move towards 1.3500, on a break below the July lows at 1.3835.
The 200 week MA should now act as a major resistance at 1.4025 on a weekly close.
GBPUSD – another lower low yesterday at 1.5915 but the pound continues to find an element of support at these lower levels having found support at 1.5920/30 earlier in the week. A break below this support level opens up the July lows at 1.5780.
The pound continues to remain oversold despite a spill over to 1.6085 yesterday and as such a close above 1.6050 could well retarget a move back to the 200 day MA at 1.6120/30 which should act as resistance for any pullbacks.
A move back above 1.6120/30 delays the move towards 1.5780 and retargets the 1.6220 area.
EURGBP – another return to the 200 day MA at 0.8690 occurred yesterday as we suspected it might and this remains the next barrier to push through for a move for a retest of the May lows at 0.8610, and ultimately the trend line support at 0.8565 from the 2010 lows at 0.8065.
The broad range referred to in earlier notes between 0.8890 and 0.8690 remains intact for now, which means the risk of a rebound remains. Nevertheless the odds continue to favour a downside break, though pullbacks could see 0.8750 as mid way resistance.
USDJPY –the peaks around the 77.60/70 area continue to cap the rise in the dollar here and as such keeps the risk on for another test lower towards the solid support at 76.20/30.
Only a close above 77.60 shifts the focus towards a test of the 55 day MA at 78.00, and then on to the bigger resistance level at 79.50/60.
Any move below the key lows at 76.20/30 could well see further US dollar losses towards 74.50.