Weak euro continues to support European markets

Weak Euro Continues To Support European Markets

All Eyes On Fed Meet, Posted on March 16, 2015

While last week’s market movements were dictated by events in Europe, with the start of the ECB’s stimulus program, as well as events in Greece, the focus this week is likely to be on events on Wednesday this week with the long anticipated Federal Reserve rate meeting, as well as the unveiling of the UK budget, as markets start to look ahead to the huge uncertainty of the UK general election, in a few weeks’ time.

Despite some what can only be described as disappointing US economic data at the end of last week, the US dollar index hit its highest levels since 2003, on Friday sending the euro to 13 year lows, and also sinking the pound to levels last seen in 2010.

Markets appear to have got it into their heads that this week’s Federal Reserve rate meeting could well be the precursor to a change in their forward guidance, which some think could be a precursor to a potential rate rise this summer.

US stocks finished the week lower for the second week in a row, while US oil prices also declined to their lowest levels since the end of January, as the US dollar swept all before it.

European markets, with the exception of the FTSE100, continued to be juiced by the European Central Bank’s easy monetary policy, which started last Monday, with bond yields continuing to decline to record lows, while the German DAX recorded its ninth positive week in a row, posting record close after record close, virtually every day last week.

Given that the US dollar has risen 25% on its trade weighted index in the last eight months the potential for disappointment at this week’s meeting continues to rise by the day, particularly given that recent economic data appears to suggest a softening of economic activity, as we come into Q1.

This afternoon’s latest industrial production data for February is expected to show a 0.2% rise, while manufacturing is expected to decline from 0.2% to 0%.

While the US dollar has enjoyed a strong rally in the last few months, so has the pound,though not across the board and we have seen a significant sell-off in the last few days, after comments last week from Bank of England governor Mark Carney, which suggested that continued falls in inflation could well signal lower rates for longer. Some disappointing economic data from the construction sector didn’t help matters either.

This unexpectedly dovish tone could well change again later this week, especially if average earnings data continues to push up away from the 2% level. In December we saw them jump from 1.7% to 2.1%, and a further gain could well help put a temporary floor under the pound particularly against the US dollar, where it has lost a lot of ground in recent days.

As far as events in Greece are concerned, they continue to play out with mixed messages continuing to come from Greek government officials.

The government is scheduled to make another repayment to the IMF today of €450m, against a backdrop of reports that finance minister Varoufakis suggested that the Greek government would be prepared to delay some of the pre-election pledges in an attempt to build trust with its creditors, claims that the minister subsequently denied..

EURUSD – having made a new 12 year low at 1.0462 the euro continues to track lower and while it continues to struggle above the 1.0600 level, the prospect of a move to parity remains very much a possibility. The move lower continues to get more and more overextended, yet new lows continue to be hit every day. A move through 1.0600 could well signal a short squeeze back to 1.0800.

GBPUSD – the pound punched lower last week through its 2013 lows at 1.4820, and could well be now set for a move back towards the May 2010 lows at 1.4230. We need to get back through the 1.4830 level to stabilise and signal a move back towards 1.5000.

EURGBP – last week we saw a strong rebound in the form of a strong bullish daily candle which could suggest the beginnings of a rebound having punched back through the 0.7110 level. We need to hold above the 0.7100 level to suggest kick on towards resistance at the 0.7230 level. Only a concerted break below 0.7000 could potentially open up a move towards 0.6600 and levels last seen in late 2007.

USDJPY – the failure to push beyond the new multi-year high at 122.05 last week could prompt a pull back towards the 119.80 area in the short term, but while we hold above this level the prospect of a move towards the 2007 highs at 124.20 remains.

 
 

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