Yesterdays better than expected 3 month European Central Bank lending auction saw a much lower take up of euros than the market had expected at €131.9bn, and this saw the single currency regain some ground, as concerns about the European banking sector subsided a little in lieu of today’s maturity in the 1 year emergency loan facility.

This smaller roll-over than expected has served to assuage some of the anxiety felt by market participants about the solvency of European banks.

The pound also suffered from a bout of profit-taking after its recent gains on the back of slightly more dovish comments from MPC member Adam Posen who countered fellow MPC member Andrew Sentance’s hawkish remarks the day before.

However risk appetite has continued to remain fragile and yesterday’s US ADP numbers underlined the fragility of investor sentiment when they came in much lower than expected at 13k against an expectation of 60k. This fragility was reinforced later in the day when ratings agency Moody’s announced that it may cut Spain’s Aaa currency government bond ratings by as much as two levels after a three-month review, due to concerns about long term growth prospects. This shouldn’t really have come as a surprise seeing as Fitch downgraded Spain over a month ago and isn’t really anything that the market shouldn’t already have priced in to some extent. In this respect Moody’s is somewhat behind the curve but then what else is new when it comes to the ratings agencies.

Any hopes that the Chinese economy would somehow come to the rescue with respect to risk appetite were to put to one side overnight after PMI declined to 52.1 in June, its lowest since February, and below the 53.1 expected indicating continued cooling in the Chinese economy.

Friday’s US employment report now takes on much greater importance, from a risk appetite point of view, with market and investor confidence exhibiting such fragility at the moment.

Even allowing for Friday’s key payroll data we also have a lot of data today, with US weekly jobless expected to come in around 460k, while ISM manufacturing for June is expected to decline slightly to 59, from 59.7 the month before.

EURUSD – yesterday’s rally back through the 1.2250/60 area to touch 1.2310 after yesterday’s relief about bank financing highlights the somewhat skittish nature of the market as the single currency continues to trade in its broad range between the key support at 1.2135/45 and the range highs around 1.2400. For now the single currency appears to be trading in a slight downward channel with trend line resistance from the 18th June highs coming in around the 1.2340 area. We could even squeeze as highs as 1.2400, but while the recent highs remain intact we still expect a break back towards the June lows.

GBPUSD – the pounds recent good run came to an end as a bout of profit taking kicked in pulling it back below 1.5000 after this week’s high of 1.5130. This was not really unexpected though we have slipped below 1.4980 and could test the longer term support around 1.4760.However the break above 1.5000 has shifted the balance of power slightly towards a possible extension towards 1.5250 in the near term and possibly the 50% level of 1.5345. A break below 1.4760 would negate that scenario and signal a deeper move towards 1.4500.

EURGBP – and end of month and quarter relief rally has seen the euro break back through above the 0.8170 level and it over spilled to hit 0.8228. The lower euro scenario continues to remain intact now while the single currency is able to hold below resistance around the 0.8320/30 area.The next target remains for a test towards 0.8000 on the way to 0.7785 over the coming few month’s which is a 61.8% Fibonacci retracement of the same 3 and half year up move.

USDJPY – the recent lows between 87.95 and 88.30 should continue to act as a strong area of support in the short term. While the dollar is able to hold above these key support levels we should be able to see a rally towards the 89.20/30 area. However, we would need to see a rally back above the 89.75/80 area to re-target a move towards the 90.20/30 area.On the flip side of that a sustained break of 88.00 could well re-target the lows of last year at 84.80 and re-open nervousness about possible Bank of Japan intervention, as Japanese exporters get impacted by the recent yen strength.

Michael Hewson

Market Analyst