The Euro has continued its recent surge higher on the back of renewed optimism about the banking system, and the outcome of the forthcoming European stress tests, but also on the back of a significant recovery in both German imports and exports for May. 

The European Central Bank also sounded a cautiously upbeat note on recovery as both it and the Bank of England left monetary policy unchanged yesterday, which was no surprise, but there is some concern that UK rates may be susceptible to upward pressure, if UK inflation figures due out next week remain “sticky”.

Today’s release of UK Producer Prices input and output prices for June may give some clues as to the extent of inflationary pressures building up in the UK economy and manufacturers willingness to pass increases in costs down through the supply chain.

Today’s release of the UK total trade balance for May is expected to show a deficit of £3bn. With the weaker pound the expectation is for exports to improve, but there is the possibility that the recent weakness in the euro could well hinder this expectation.

Yesterday the International Monetary Fund released its quarterly report on global growth estimates and revised it upwards by 0.5% to 4.6% and this has sparked further invigoration of risk appetite.

The IMF did express concerns about Europe’s debt problems and whether they could well spill over to other regions and stall the global recovery, but they went on to add that a “double-dip is very unlikely”.

Growth forecasts for this year were raised for the US economy by 0.6% to 3.3%, while Germany and other European nations were left unchanged at 1%. The UK’s forecast was revised downward by 0.1% to 1.2%., as a result of the measures brought in by the government to rein in spending. However despite this optimistic outlook the report went onto say “that downside risks have risen sharply”, which sort of begs the question why change the forecasts in the first place?

EURUSD –despite a dip towards 1.2550 on Wednesday the euro remains stubbornly well supported due to current dollar weakness and continues to make marginal new highs towards the long term trend line 1.2730. This recent rally in the Euro looks set to test the down trend line resistance from the 1.5142 highs in December, which comes in at the 1.2730/50 level. A break of 1.2750 would target a move towards 1.3000.

The 50 day moving average around the 1.2430 level remains the key support area and this area needs to hold for further upside to be forthcoming.

GBPUSD – the pound continues to find the air thin anywhere near its recent highs and the resistance around the 1.5230/50 area.  This inability to follow through is a concern as it continues to range trade between its recent highs and the support of the last 3 days around 1.5080. 

A break below these lows could well yield up a deeper test towards 1.4980, while a break above 1.5250 targets the key resistance levels 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 now comes in around the same level.

EURGBP – the single currency continues to maintain its recent gains managing to hold above the 0.8300 level and continuing to make new highs 2 week highs. A break below 0.8280 is needed to re-target the downside and the 0.8170 level. While the key level on the topside remains around the old June 2009 lows around 0.8400. This was the long term support, the break of which targeted the move below 0.8170 last month.

USDJPY – the dollar has managed to stay above the 88.00 area. While it does so we should see a move back towards 89.20. A drop back below the 88.00 level would re-target the downside risk of a move back towards 86.80.

Michael Hewson

Market Analyst