Despite holding above the 1.3000 level for some hours this morning, the EUR is lacking the momentum to push above USD1.3020. The EUR has fared well vs the CHF and for the most part vs both the JPY and the GBP. Cable is meeting solid resistance at the USD1.5530 level despite the strong reading in the CBI retail survey.
Yesterday's apparently good set of US homes sales provided a tangible lift to risk appetite. The strength in the June data can be challenged by the fact that May was revised down heavily and by ample supply of housing stock in the US. The fact remains that the US housing market could remain troubled for many months yet suggesting that it may be premature to draw strong conclusions from yesterday's data. Today's release of US consumer confidence data will be the next test for the US economy. The market is expecting a slight softening in the survey to 51.0.
As investors continue to question the pace of the US recovery, the German economic recovery was endorsed further this morning by the better than expected increase in the Gfk consumer confidence survey. Eurozone M3 data also rose faster than expected at +0.2% y/y. While this is still a slow pace of expansion, economic data in the Eurozone has clearly been sufficient to allow the ECB sufficient confidence to continue reigning in its non-standard policy measures.
Last week the ECB bought a mere EUR 176 mln of bonds; the lowest weekly amount since the bond buying programme started on May 10. On the money market, Euribor continues to tick higher. The more confident tone of the German economy and of the ECB is supportive for the EUR. Medium-term the EUR may come under pressure again if the issue of sovereign default intensifies but near-term some of the doubts regarding the coherence of EMU appear to have been relieved.
There are many valid criticisms of the EU's stress tests on the banking sector. However, investors have been prepared to buy the stock of many banks on the back of the tests suggesting that for the strongest banks at least the tests have been seen as a welcome addition to transparency. A break above EUR/USD1.3020 may see towards 1.30075/95.
The UK CBI July survey has reported the strongest rise in retail sales for three years. As with last week's stronger than expected UK Q2 GDP report and the recent stronger than expected June retail sales data it is possible to argue that the strength of these series going forward will be sapped by the fiscal austerity in H2. Nevertheless, the economy appears to be in far better position to absorb the impact of fiscal repair than the consensus had expected.
While the UK will suffer headwinds later this year, these better data argue in favour of a hastened correction in the budget deficit and thus bode well for sterling. Cable is currently trading near the highs of the session at USD1.5529. There is a strong band of technical resistance in the USD1.5525/80 area, above may see a leg higher.
Tomorrow's Australian CPI data could be a key element in determining the pace of any further RBA rate hikes going forward. The data thus promises to set to tone for the AUD through the rest of the week. The positive technical outlook has improved further on the move by AUD/USD above the 200 day sma suggesting scope for further gains. Fundamentally, however, there are still risks to the medium-term outlook for the AUD. The unit remains particularly vulnerable to concerns about the growth pace in China in addition to concerns over the pace of the US recovery.
US Case-Schiller home price data and US consumer confidence data are due today.
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