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  • FOMC minutes unlikely to deliver market-changing news
  • BOJ - to QE or not to QE?
  • Eurozone: more pain for Spain, but yields are moving in the right direction
  • GBP strength on Posen comments

In the absence of much economic data to direct markets the euro mostly drifted through the day. The dollar got its groove back towards the European close especially against the single currency. The markets are waiting for the FOMC minutes, and while we don't expect them to include anything market-moving as such, we do think there could be some volatility in the greenback as the market tries to detect some signs that the Fed is about to embark on more QE. If the Fed sounds worried about the economic outlook then we could see a knee jerk reaction lower in risk (higher in the dollar), as markets fret about the state of the US economy. However, the decline could be stemmed as the market prices in the chance of more QE especially after last month's lacklustre payrolls data.

The pound has been the strongest performer out of the majors today. It was given an extra boost by BOE member Adam Posen, a former uber-dove, who said the Bank of England had done enough on QE for now. This has helped to boost the pound's yield differential, especially versus the euro, and EURGBP declined to its lowest level since 2008 today below 0.7875. So how long can this downtrend continue? Although the UK's economy looks weak, the Eurozone's sovereign crisis and the deep recession experienced by the periphery makes the euro a less attractive option than the pound from a fundamental perspective. From a technical perspective this pair is starting to look oversold on both a short and long-term basis, so we may see some consolidation in the short-term, even though the long-term trend is still lower, in our view. Thus, there may be some buying interest in the short term as we head towards 0.7850.

The Eurozone and Spain in particular, dominated headlines this morning. Although PM Rajoy delivered more austerity (his fourth round of spending cuts since getting into power in November), which may weigh on growth, the steps towards reform of public sector pay and of unemployment benefit seemed to be warmly welcomed by the bond market. Spanish bond yields declined 25 bp today to below 6.6%. Interestingly, Spanish bond yields have diverged slightly from the euro, with yields falling (Eurozone +ve), while the euro came under pressure. This is interesting: could the euro start trading independently of credit risk in the region, and instead trade more on the depressing growth outlook and narrowing rate differential? This is one to watch.

Looking ahead, European traders need to prepare for an early announcement tomorrow morning from the BOJ. It concludes its policy meeting tomorrow. It will publish an interim update on its GDP and inflation projections, with the latter being watched closely to see when the Bank forecasts inflation to reach its target 1% CPI rate. The market also expects the BOJ to join the ECB, BOE and PBOC by loosening monetary policy further and boosting its asset purchase programme by another Y10 trillion, bringing the total size of the Asset Purchase Programme to Y 80trillion. This could cause some volatility in USDJPY, however we don't think this will have a major impact on the yen as monetary conditions are already loose and in the current environment - where markets are jittery - USDJPY may remain well bid. Thus, we could see a dip back towards 78.50 in the near term.

Data watch:



Key technical levels: majors



Ones to watch: SPX 500


Both technical and fundamental signs point to further weakness in the SPX 500. There has been a weak start to Q2 earnings season (we need to hear from more companies to get a grip on how bad it has been) but overall, a weak corporate and economic outlook suggest stocks in the US may have a tough time in the coming weeks. Some lead indicators including the small cap Russell index, the Nasdaq and the Dow Jones Transportation Index are all testing some key support levels.

At the close yesterday the SPX was testing 1,340 - the 50-day sma. The index has opened lower today, and a move below this level opens the door to a sharper decline towards 1,300 - the 200-day sma.

SPX 500




Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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