Euro and sterling fall across the board edges on poor economic news, prompting some stability in the dollar despite prolonged strength in oil prices following the Jeddah Summit between major producers and consumers. Germany’s IFO business climate index fell to 101.3 in June from 103.5m reaching its lowest level since January 2006. Markets had been expecting a figure of 102.5. The current assessment and expectations of the survey also fell well below expectations. Renewed declines in UK housing figures dragged sterling across the board, while a contraction in French manufacturing and services industry may hamper expectations of a July European Central Bank (ECB) rate hike.
The aforementioned factors are offering some stability to the U.S. currency, which came under severe pressure last week in the midst of a barrage of negative economic and corporate news as well as gloomy announcements and assessments by hedge funds and investment banks regarding the state of the mortgage-market related write downs and equity market outlook. But Wednesday’s Federal Open Market Committee (FOMC) decision is likely to further curtail market odds of a 2008 Fed hike and rein in some of the dollar gains seen over the past month, especially against the yen. Markets will also scrutinize the week’s releases on U.S. consumer confidence (Tuesday), new homes sales (Wednesday), existing home sales (Thursday) and personal spending (Friday).
The FOMC decision is expected to keep rates unchanged at 2.00%, with a statement that would express worsening inflationary conditions and an alertness towards weakening economic growth. As long as the Fed continues to defy the economic and market conditions by focusing on increased inflation, markets will continue to respond negatively, to the extent of further eroding major equity indices and worsening the pricing of credit derivatives.
Euro supported at $1.54 ahead of FOMC
The broadly dismal showing of Euro zone economic data brings to question the validity of the ECB’s persistent emphasis on inflation and current market expectations (above 70%) of a July rate hike, but increased uncertainty with U.S. economy and financial markets is preventing the green light to sell the euro. Rather, the indicator is pointing to an orange signal, suggesting neutral positioning between $1.5355 and $1.5655. Recall, OPEC sounded off skepticism with Saudi Arabia’s decision to raise output by 200K, with the organization’s Secretary General Khelil indicating no real demand for the increased supply. With oil hovering at $136.95 per barrel from the session low of $134.17, euro is seen supported at $1.5490 and 1.5460.
Yen downside limited
The U.S. dollar is up half a yen against the Japanese currency 107.80s on negative preliminary figures for the Q2 Tankan survey on business sentiment. Despite uncertainty in Japan, the yen may garner support from the deterioration in U.S. banks. Reports from the Wall Street Journal that Citigroup is expected to reduce 10% of its investment banking unit and the Financial Times reporting similar percentage of job cuts at the same division in Goldman Sachs. Additional indications that bank executives have encountered unexpected resistance from investors in their quest for to raise capital may also weigh on overall market sentiment and limit any dollar gains beyond 108.20.
The U.S. data releases of the next two days may prop USD/JPY to as high as 108.35-40 but the onset of market reaction to an FOMC statement that is increasingly perceived to have shut the door on further easing could prove negative for market sentiment. We stick with our projected interim support of 107.50, backed by 107.20 and 106.75.
GBP accelerates declines
One way to highlight sterling’s weakness is to assess its day’s declines compared to those of the euro following the weak IFO survey. The 1.2% decline in June Rightmove House Price Index was relatively easy catalyst to prompt GBP declines. Not only has GBP/USD tumbled more than 1.5¢ to $1.9600, but EUR/GBP has risen to 0.7915 from 0.7895 and AUD/GBP has climbed to 0.4852 from 0.4823. This supports are long term bearishness in GBP/USD and assess incoming downside target at $1.9570.
Technically, the long term weekly chart continues to send a head-and- shoulder signal (classic bearish formation) whose resistance remains imposed at $1.9820-30. And the fact that the weekly chart shows the erasing of two weeks’ gains in a single week highlights the relative ease by which the bears continue to get the upper hand. Thus, any positive dollar surprise from the week’s U.S. data releases and/or Fed policy statement is likely to prompt considerable USD gains vs. GBP. Subsequent support stands at $1.9520 and $1.9480.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
