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STOP PRESS: the euro is one of the strongest performers in the FX world today, along with the Swissie, while the yen, the Aussie, the Kiwi and the dollar have had a mixed day. We are still in the middle of holiday season in Europe hence the markets are having some strong reactions to events that may otherwise not be received so well by the markets. The bounce in the euro was kicked off by Greece (yes, Greece) after it recorded "better" than expected GDP for Q2. The economy contracted by an annual 6.2% in Q2, vs. expectations of a 7% decline. This hardly helps the Greeks, who also saw their unemployment rate surge to a record high of 23.1% in May. When this type of data starts to impact prices you know the markets are clutching on straws and are desperate to rally.
An inconvenient truth...
The sentiment was similar when an Italian 12-month bond auction was well-received and investors charged a 2.767% yield to buy the debt highlighting how Italian bond yields have fallen sharply since mid-July. However, the markets seem to be conveniently forgetting the one thing that makes Italian debt so unsustainable in the long-term - the amount of it they have. The latest data for June, which was released this morning, showed Italy's stock of debt jumped to EU1.972 trillion in June, up from EU1.966bn in May, which is a whopping $9bn increase in just 4-weeks. Considering Mario Monti has garnered praise for his fiscal reform and consolidation efforts they are yet to make a dent on Italy's debt mountain. However, the market is not thinking that long-term at the moment and instead is concentrating on the potential for moves in the 24 hours (or that is what it seems like).
Economic data - new pieces of the jigsaw
The next few days could help shake markets out of their lazy, slightly bullish malaise. We have Eurozone GDP tomorrow along with German ZEW for August. Both are expected to show a weakening in the economy. Thus the euro may be setting itself up for a fall if the data disappoints. 1.2380 is key short/term resistance ahead of 1.2480. Weaker GDP data or further signs that Germany's economy is coming under pressure could cause another leg lower in the euro. Below 1.2320 opens the way for a re-test of 1.2250 - last week's lows. I see the euro remaining fairly range bound until we get more signals from the US regarding its economy. The key data will be consumer prices released on Wednesday. Core inflation (which is looked at by the Fed) is expected to remain steady at 2.2%. This is just about okay for the Fed as it is close to their target rate of 2%. Any signs of weakness could trigger QE-fever as we lead up to the Jackson Hole meeting at the end of this month.
The biggest events of the next few hours are the BOJ minutes and NZ retail trade data. The BOJ minutes will be watched closely for any sign that the central bank is worried about growth and could loosen policy further (yen negative) after weaker than expected Q2 GDP. However, this week is a national holiday in Japan so the reaction to the minutes in the FX market could be fairly muted.
Source: Forex.com and econoday
One to Watch: USDCHF
The Swiss authorities continue to maintain their peg to the euro and it shows no signs of being abandoned a year after it was put in place. The latest pledge to keep the peg caused some strengthening in the Swissie versus the dollar and USDCHF is testing a key resistance level at 0.9690 - the 50-day moving average and the bottom of its most recent range.
This is an important level for this pair - if it falls below it then it could signal further weakness in USDCHF towards 0.9500 - the low from early July, if it can bounce higher from here then we may see the dollar make another stab at parity. There is a lot of important economic data out of the US this week that could influence the medium-term direction of the dollar. Strong data could put expectations of Fed QE on the back burner, which is dollar positive, while weak data could spark a sell-off as the market may increase expectations of a stimulus announcement at the upcoming Jackson Hole conference on 31st August.
This isn't a trade for right this minute, but it is worth watching and acting on as the data comes out of the US and the prospect of more QE from the Fed becomes clearer.
USDCHF: Daily chart
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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