London – 6th July 2010

Yesterday’s US holiday gave the market the perfect excuse to do as little as possible as currencies traded in fairly tight ranges.

Concerns about global growth continue to weigh on markets over the last 24 hours after the slowing service data out of China last week, with UK Service sector PMI for June yesterday coming in slightly worse than expected at 54.4, against an expectation of 55.0, its slowest rate for 10 months. This weaker than expected data knocked the pound lower and has lowered expectations of any move higher, or indication of a move higher on interest rates in the near future. The other noteworthy announcement on an otherwise quiet day was the addition of NIESR’s Martin Weale to the Monetary Policy Committee from the August meeting, though this was largely met with indifference by the market due to the fact that he sits broadly between the dove and hawk camps.

The single currency has also slipped back slightly after its recent gains after comments from European Central Bank President Trichet urging continued austerity measures amongst European governments to rein in their budget deficits.

As expected the Reserve Bank of Australia kept rates unchanged at 4.5% exercising caution and a pause over concern about the global growth outlook and this inaction has boosted risk appetite slightly in Asia, with the US dollar losing a little ground.

The only US data of any note today is ISM Non-manufacturing data for June which is expected to come in around 55, a slight decline on last months figure of 55.4.

EURUSD – the failure to get above the 1.2610 level on a daily close throws into doubt the ability of the single currency to follow through on its break higher last week. While the unexpected break up through 1.2400 has certainly delayed the anticipated move back to the June lows at 1.1880 it certainly hasn’t ruled it out. Dips so far have been confined to the 1.2480 level.

The 50 day moving average should act as an area of support around the 1.2450 level and this area needs to hold for further upside to be forthcoming. 

The inverse head and shoulders pattern break we saw last week would ordinarily herald a strong move higher; however its break conflicts with a much longer term 5 year monthly break down which could cap the Euro around 1.2780. Next resistance remains around 1.2610, a break of which targets 1.2670.

GBPUSD – the drift back from Friday’s highs has seen the stretched momentum begin to subside as the pound has slipped back towards the interim support area around 1.5080 yesterday. A break below yesterday’s lows could well yield up a deeper test towards 1.4980. The key resistance levels on the top side remain around the 50% retracement level of the 1.6460-1.4230 down move at 1.5345, as well as trend line resistance from the November 2009 highs at 1.6880 which comes in around 1.5375/80.

EURGBP – the failure so far to break above 0.8300 keeps the focus on the downside despite the gains of the past few days. The lower euro scenario continues to remain intact for now while the single currency is able to hold below resistance around the 0.8320/30 area. In the unlikely event of a move above this area the longer term resistance around 0.8400 should cap. Longer term the objective 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 3 and half year up move from 0.6570 to 0.9805.

USDJPY – continues to look heavy on the back of declining US yields and diminished risk appetite. The US dollar looks to be set to head towards 84.80 by way of support around 86.80. A recovery back above 88.20/30 is needed to stabilise the dollar in the short term

Michael Hewson

Market Analyst