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The euro is climbing to its highest levels of the week. FX traders seem to be able to shrug off the mass protests going on in Spain and Italy and instead are breathing a sigh of relief that Greece won’t default on Friday when it is due to pay a EU5bn bond redemption payment. It also has a EU5bn payment due next month, so this uncertainty around Greece could last some time especially with the next tranche of bailout funds still hanging in the balance. Right now it appears that Greece will get the extra EU 1 bn it needs to meet Friday’s financing needs after auctioning EU4 bn of T-bills yesterday. That is all well and good, but this rally doesn’t smell right to us, and we believe people will still choose to sell into strength.

GDP risks for the euro

The rally in the single currency could be short-lived as we get Q3 GDP data from the currency bloc tomorrow. A decline of 0.1% is expected, which would be the start of an official recession for the currency bloc after a 0.2% decline in Q2. The risks are to the downside after the currency bloc’s industrial production shrank at its fastest pace since early 2009 in September. For some Eurozone members recession started a long time ago. Greece’s economy is shrinking at a 7.2% annual rate, the economy deteriorated at a faster pace in Q3 relative to Q2 after shrinking 6.3% annually in the three months to June. This is the 17th consecutive quarter of negative growth for Greece; it is hard to see how it can climb out of this crisis, especially after the government passed another round of austerity in the 2013 Budget on Sunday. Right now weak growth is hindering efforts to bring down public debt. However, the powers that be in Brussels seem to be out of ideas when it comes to bringing the Greek problem under control.

The biggest problem looming for the currency bloc: the lack of growth

Spain is also expected to register its 6th consecutive quarter of negative growth tomorrow. While Madrid isn’t in the same dire straits as Greece, weak growth and public sector spending cuts are proving to be a toxic mix. The ECB’s OMT action doesn’t solve this problem, it only makes it easier for Spain to borrow more and thus not default. Targeting the underlying problems in the Eurozone’s economy will take years of deleveraging and economic pain. The Conference Board in the US, its top forecasting body, has predicted a decade of weak to zero growth in the West as debt levels fall and countries try to live within their means. The Eurostoxx index is close to its highest levels of the year, yet is this justified? The ECB’s OMT programme hasn’t been activated as yet, and even if it is it doesn’t target the biggest problem looming for the currency bloc: the lack of growth. Thus, we will be looking at the euro and the Eurostoxx index closely in the wake of the GDP data tomorrow.

Keep an eye on Germany’s GDP figures

The other thing we will keep a close eye on is Germany. It is expected to register positive growth for Q3, and rise 0.1% on the quarter, the annual rate is expected to moderate to 0.8%, from 1% in Q2. The data has been deteriorating sharply in Germany in recent weeks, although this is likely to be reflected more in the Q4 data than Q3. However, if the German data disappoints tomorrow then we would expect large declines in the Dax index and also in the euro, as the single currency has become particularly sensitive to weakness in the currency bloc’s largest economy. EURUSD is running into resistance at 1.2750 today, if it breaks above here then we expect more selling pressure towards 1.28. Support lies at 1.2700 then at 12653 – the base of the Ichimoku cloud.

Japan’s political mess weighs on the yen

Watch out for FOMC minutes this evening to find out if the Fed has plans to extend Operation Twist after it expires at the end of the year. If it does plan to Twist again, then we could see some selling pressure on USDJPY. This cross moved sharply higher today after the Japanese Prime Minister said that he would dissolve parliament at the end of this week. A general election for the lower house will now take place on 16th December. This could up the ante for yen-negative rhetoric from politicians desperate to win an election on the back of promising stronger growth ahead. We believe the political and economic backdrop is extremely yen negative. Although the yen is still a safe haven, it is at risk from a sustained selloff if the broader risk environment stabilises through to the end of the year. Resistance levels to watch for in USDJPY include 80.65 – the top of the weekly Ichimoku cloud.

Chart 1: USDJPY: daily chart - this pair is looking very overbought in the short term and could struggle as we approach 80.30.


More QE from the BOE?

The Bank of England delivered a glum tone to its last Inflation report of the year when it was released this morning. The key takeaways include:

  • The BOE isn’t done with QE yet, and still believes it is a useful policy tool.
  • Inflation is likely to stay higher for longer
  • Growth is likely to be weaker than expected
  • A strong pound could hinder the recovery even more

There was some expectation that the Bank may move away from QE after some recent commentary from BOE officials who questioned the effectiveness of QE. Along with the fairly downbeat tone from the Governor and his compliant about the strength of sterling, this all weighed on the pound, this is one of the big underperformers in the G10 today. However, King is only one voter on the MPC, and just because he is a fan of QE doesn’t mean that he will win the vote and there will be more QE for the UK economy. Hence why we believe the pound will be stuck in a range between 1.5850 – 200-day sma – and 1.5900 – daily Ichimoku cloud base – in the near-term.

Chart 2: GBPUSD – hourly chart


Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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