By Dean Popplewell
Very few of us know little else. Unless the EUR is under pressure, the pressure is on our trading. You win a little and you lose a little. That so far is the general mood, nothing too big on either side of the equation. Market risk is easing after a four day consecutive gain as euro financial markets try to stay in consolidation mode this Wednesday morning. Easing from Central Banks has mostly being the ‘only’ topic of late, particularly after the ECB’s Draghi promised to safeguard the euro area. So, it’s only naturally that some of that expectation deflates, allowing investors to get there wind again before embarking on the next leg. Hence why equities are smallish under pressure, and why FI has lower bund yields and Spanish product is backing it up a tad. All of this is not favoring the EUR has it leaks its recent gains.
The soft reading in German order numbers yesterday is part of a series of data that is expected to provide more evidence of “profound weakness in core and peripheral euro weakness activity.” Many believe that overall euro data should support expectations for ECB policy easing and keep the single unit on the defense, even in this tentative environment of risk taking and diminished systemic risk. This morning, EUR barriers get to fight another day as the pair slips lower and further away in early European action. Option barriers placed at 1.2450 have survived attempts to knock out over the past two days. Strong defensive barriers ahead have been little dented. Dealers now believe that given that the EUR outright momentum is slowing, those barriers are in no immediate danger.
BoE King has hit the airwaves early this am, touting that it’s impossible to know how long this recession is going to last. There is no historical precedent for affect for financial crisis and that he and his cohorts require time for QE and funding for lending to work. The BoE is a believer in the governments austerity program, its appropriate. With the euro zone uncertainty is making financial forecasting near impossible. It’s no wonder that the ‘Old Lady’ cut its forecasts for growth and inflation in the UK economy, giving investors a signal that it could inject further stimulus in the coming months. Policy makers firmly believe that the “damaging economic effects from the financial crisis could persist longer than previously thought, while inflation is likely to fall below target from mid-2013 and remain there for two years,” and this after further increasing AP in July. At the end of 2013 they expect annual growth of just over +2%, this is down from a forecast of +2.5% in May.
Europe’s crutch, Germany, is beginning to show and feel the pressure. German exports (-1.5%) and imports (-3%) fell in June, reversing the previous months gains, in a sign that the worsening eurozone debt crisis is taking its toll on the once “robust export business’. Obviously all of this will eventually weigh on domestic growth, regional growth and further eurozone growth. To date, the German economy, Europe’s largest, has so far remained relatively resilient to the debt crisis, posting Q1 growth keeping the euro-bloc recession free. However, recent data is starting to affect the country anemic growth. Yesterday’s unexpectedly decline in German factory orders (-1.7%) along with this mornings disappointing IP numbers (-0.9%) is strong proof that the mighty is beginning to wobble. Germany is seems has slowly been putting on the breaks in Q2. The economy does not seem to be as resilient to the euro-crisis anymore. It’s only fitting that the EUR is again struggling this morning.
According to the tech boys and girls, the first true line of EUR defense is expected to appear around 1.2320 as a “lateral rectangle consolidation phase is being traced out beneath Monday’s 1.2444 high.” That is way too poetic for me, I would rather look at our retail order book and talk to the market to find a similar consensus of support, which largely, is close enough to being here. The retail sector remains comfortable short the single unit as the overall market continues to recover from its July 24 low (1.2042), trading to 1.2444 (+61.8% retracement of the 1.2693-1.2042 down-leg) Monday. The overall “technical” momentum remains positive, however, German data over the past two day’s confirms that the EUR crutch is under pressure and one gets the feeling that the ECB easing fear needs to be seen before been feared!