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The markets have been in fairly jubilant mood today, pushed higher by the prospect that the world economy will survive after fears of a catastrophic global recession surfaced a few months ago. The latest data suggest that the UK isn't as mired in recession as the GDP data for Q2 suggested, the US has seen signs of life in its labour market, trade data and in its housing market, which has been the one part of the jigsaw puzzle missing in its economic recovery. Politicians in emerging markets, which have seen fabled growth rates start to dwindle in recent quarters, have added to stimulus programmes to try and kick-start growth. Brazil announced a multi-billion stimulus programme on Wednesday to try and boost infrastructure investment, while Chinese officials have hinted that Beijing will do all that is necessary to protect growth in the Asian powerhouse.

Since most of Europe's politicians are off on their summer holidays the markets haven't had much headline risk to contend with so they have not been reminded that Spain remains rudderless and still hasn't asked for a bailout. This has allowed the markets to focus on one thing it has been starved of: yield. Risky assets are higher while the dollar index is lower after rejecting a key resistance level at 82.65. This has allowed EURUSD to make another stab at 1.24; it has also helped commodities like oil. Brent crude is back above $116 per barrel.

The US data today is moving in the right direction, but is it great?

The 4-week moving average of initial jobless claims dropped to 363,750, after 369,250 last week. A year ago this figure was 402k, so there has been some improvement, albeit quiet muted. Homebuilders in the US have the most confidence since 2007 according to the NAHB survey for August, and the Philly Fed industrial survey also showed signs of improvement along with industrial production for July. This is all good news, and fairly supportive of the dollar, but it is hard to argue that the US data has been astonishingly strong - it hasn't. If anything the data is fairly dull and boring, hence the risk rally may be more cautious than usual as investors move into higher yielding assets, yet at the same time keep one hand on the sell button in case the economic outlook deteriorates later this year.

EURUSD and the ECB

EURUSD is close to its highs of the week, at 1.2380. This is a major resistance zone and will test the strength of the bulls. If they really think that the sovereign crisis in Europe is over (based on scant evidence, in my opinion) then we could see EURUSD jump the 1.2420 hurdle and march on towards 1.25 in the medium-term. But if investors start to wonder why the euro is rallying the bulls may lose their nerve and start to sell at this important resistance area. The rally was sparked even though an EU spokesperson had to deny that Spain had requested some of the EU100bn of aid for its banks after the ECB changed its rules on how much it will lend to banks in return for collateral that is sovereign debt. It's difficult to read the market's reaction when it comes to developments in the Eurozone in recent weeks. For example, on the one hand did markets rally because they are happy that Spain didn't ask for money even if its banks are in trouble, or did the markets rally because an EU official said that any potential aid request from Spain could be dealt with swiftly? There is one major ingredient missing here: ECB policy action. The central bank remains on the side-lines unwilling to commit to becoming the lender of last resort for the currency bloc, thus I don't believe this euro-based rally is sustainable until the ECB makes its position clear.

I may not be alone in the markets. The euro may have had a strong day today but the bond markets are telling a different story. German and US government bonds, both considered safe havens, have also rallied pushing yields lower. Since bond yields had been edging higher of late, it's too early to say if this is a change in trend or just some people in the market squaring up their positions ahead of the weekend, but I will be watching the bond market closely for further clues. If bonds continue to rise (yields fall) it suggests the rally is weak and may not last.

Ones to watch:

This is not the case for the pound. It has been one of the strongest performers today after another positive data surprise. First there was unemployment then there was the retail sales data for July released earlier on Thursday. Retail sales including petrol rose by 0.3% - the market had been expecting a 0.1% decline. All of those extra jobs the UK is creating seem to be boosting the High Street as the Office for National Statistics reported that the weekly spend for July 2012 was GBP6.7BN, vs. GBP6.6bn in June and GBP6.5bn a year ago. Low prices helped to boost food sales, which is good for the consumer and the retail sales data but could eat into supermarkets' margins. This didn't stop the pound from rallying strongly. GBPUSD has, finally, made a stab at 1.5740 - its 200-day sma. This is a major level for this cross and above here opens the way to a longer term move back to 1.60. We will be watching this cross extremely closely in the next 24 hours. A weekly close above 1.5740 would be an extremely bullish sign for cable. GBPJPY has led the way in the sterling rally and is already above its 200-day sma at 124.50. The next hurdle to climb is 124.80 - the top of the daily Ichimoku cloud. Above this level is considered the start of a technical uptrend and opens the way for a move towards 126.00 in the coming days and weeks.

GBPUSD: daily chart

If we get a daily close above 1.5740 this is extremely bullish for this cross.


Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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