Risk on but Spanish bond yield rise holds the euro back

Morning Comment        

Current mid-market inter-bank spot rates (as at 07:20 GMT)

Major sterling

Major US$

Sterling emigrate

Other sterling

Euro crosses

Data / Events due today

A quiet morning yesterday, before and after UK unemployment data and Bank of England minutes. Labour data was generally better than expected with the exception of jobless claims which rose slight more than expected. The ILO unemployment rate dropped a notch to 8.1%, a 9-moth low, with 181,000 additional jobs created in the 3 months to May while ONS data showed 65,000 fewer people out of work over the same period. Bank of England minutes also failed to ignite FX markets with a 7-2 vote in favour of increasing the asset purchase program by £50bn largely expected as was rhetoric regarding the threat to growth from the EZ crisis.

If data wasn’t able to move the market, German Chancellor Merkel certainly was. Markets reacted badly to a newswire headline quoting her saying she cannot be sure European project will work. In the wider context, she also said she was ‘optimistic we will succeed.’ The US dollar once again rallied on the news as investors pared back risk. ECB board member Jorg Asmussen didn’t help either as he noted a German court rejection of ESM would mean failure for the program. However obvious this latter statement may be, market reaction shows how easily swayed investors are in the current environment. There were also rumours of a downgrade to Austria doing the rounds to throw into the bad news mix.

In the States, housing starts continued to pick up although both starts and permits remain close to historically low levels. There was a notably better feel to markets from a risk perspective in the afternoon session despite IMF again noting severe downside risks in the Eurozone, see inflation falling and staying below 2% and that there is room for additional stimulus measures from the ECB, including another cut in interest rates. Last night’s Beige Book was a slight downgrade from the previous report with growth now described as modest to moderate from moderate last month.

Overall, it was a risk positive day with equity markets rallying and the dollar giving up some ground, particularly against the Australian dollar. However, the euro was unable to take advantage with Spanish bond yields once again on the rise.

A significantly quieter calendar for today. The only release of note this morning is UK retail sales, expected to show a second consecutive month on month increase although at a slower pace than the 1.4% seen in May. In the US, initial jobless claims dipped sharply last week; a rebound is anticipated this time around. The Philadelphia Fed manufacturing survey is expected to recover some ground from June but remain in negative territory for a third successive month. Also today, the German lower parliament is expected to approve the Spain bailout contribution.  

Technical  

£-usd 

The pound fought back from early selling pressure to close the day virtually unchanged. Daily momentum studies remain positive leaving 1.5680/1.5700 resistance in the spotlight. A break here allows for a run to 1.5720/25 initially while 1.5750/85 still provides strong resistance. Support today at 1.5580/70, 1.5555, 1.5535, 1.5500, 1.5460 and 1.5395/90 protect the 1.5270 low from the beginning of last month. 

£-eur 

Groundhog day as sterling again fluctuated around the important 1.2750 level and for a third consecutive day failed to gain a meaningful foothold north of this pivot point. Upside momentum continues to show signs of fatigue so we will continue to monitor 1.2710/1.2690 support, a break of which could prompt further selling towards 1.2635 and 1.2580/75. Resistance still at 1.2750/70, 1.2830/75 and 1.3000/25.

Analysis of further currency pairs, forward contract pricing, and information on limit or stop loss orders is available at any time on request.

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