It’s all about interest rate decisions today with the Bank of England at midday followed by the ECB at 12h45.
There’s no question that the BOE will be a case of “unch, early lunch”, meanwhile expectations are for a hike from the ECB to 1.50% as Trichet attempts to maintain his credibility by being vigilant in the face of rising inflation. The past few weeks have seen the euro winning the battle against sterling from the moment the BOE lost its only hawk and it has recently become much more dovish in its stance towards interest rates. Murmurings of further QE have really knocked the stuffing out of the pound and the threat of parity with the single currency is still very much on the agenda.
Whilst the ECB wants to look tough in the face of higher inflation by raising rates again today (and there’s a chance they may not) they are expected to sound a little more dovish and the market now expects only one more hike this year whereas before it was looking like there might be two. The economic data coming out of Europe has been showing signs that the recovery is looking tired and when you have a central bank raising rates when things are slowing down, also at a time when the eurozone remains in a complete mess, you have to have a rethink on monetary policy.
The Bank of England has been very reluctant to rethink its policy by keeping rates ultra low for fear of snuffing the economy and now that the doves are in firm control of the MPC we’re unlikely to see any change in this for a while.
The real worry for markets yesterday was the massive spike in government bond yields for the periphery. Portugal’s 10 year yield spiked massively to well over 13%. Despite this the FTSE managed to recover from its lows and even end the day back above 6000. Not a bad effort by any stretch considering what was being thrown at investors. This morning the FTSE is looking quite perky following a decent US session which saw the Dow bounce a little and sustain its rally throughout the session. At the time of writing the FTSE is at 6022. Near term support and resistance is seen at 5970/35 and 6075/90. So far this week we’ve gone sideways bumbling around 6000, give or take a few points either side indicating that the battle between the bulls and the bears is well balanced. With the rest of the week packed with important economic data releases there’s every chance that we could either see the next leg higher or more of the profit taking that we saw a little of yesterday.
Before the interest rate decision we get UK industrial production which is expected to rebound following the big declines seen as a result of the extended week ends at the end of April. The trend is starting to head downwards and this data will be closely watched in the hope that it doesn’t show signs of falling off a cliff thus raising fears of a double dip.
Later the US releases ADP private payrolls in their usual prelude to tomorrow’s NFP. This can move the markets (but not as much as the big number tomorrow) and is expected to post a decent gain, much better than last month of around 70k.
Sterling remains under pressure this morning with cable dipping back below 1.6000 to 1.5985. Against the euro it’s also struggling with GBP/EUR at 1.1145. Meanwhile the little strength in equities is painting a tint of dollar weakness within FX markets this morning and so EUR/USD is at 1.4340 and AUD/USD is at 1.0750. In respect of cable it has been starting to form a bit of a down trend over the shorter term and so 1.6025/50 and 1.6100/25 are resistance with support seen at 1.5935/10 and 1.5870. For EUR/USD upside targets are seen at 1.4400/50 and support at 1.4275/45.
Gold did well out of Moody’s downgrade of Portugal yesterday taking it back to 1533 and that is where we are this morning. The recent high of 1534 is considered a small resistance level before 1541 and 1549 whilst to the downside 1519 and 1510 are seen as support.
Oil inventories are released later this afternoon and so there might be a bit of volatility later on today. Stocks are expected to build further and so this might cap gains for the black stuff but this morning at least Brent is up a tab to 114.30.
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