Growth concerns are increasingly accompanying Eurozone tensions as major weights on market sentiment. US jobs data at the end of last week which revealed a disappointing 69k increase May payrolls added to other data including weaker than expected Chinese purchasing managers index (PMI) and even more disappointing Eurozone data highlighting intensifying downside risks to economic activity.
Combined with the lack of traction towards solutions to the Eurozone crisis it has led to an acceleration in the demand for safe haven assets. The weak US data has also reopened the debate about more US quantitative easing, with Fed Chairman Bernanke’s congressional testimony on the economic outlook on Thursday likely to garner plenty of attention.
Another central bank under pressure to act is the European Central Bank (ECB) but action such as restarting its Securities Market Purchases program and/or a third Long Term LTRO are unlikely to take place at least until after the Greek election on June 17 if at all. Until then investors will have to put up with more procrastination, prevarication and inaction from policy makers in Europe as the ECB continues its game of chess with European politicians.
Other central banks in focus this week include the Reserve Bank of India (RBA) and Bank of England (BoE) but while the ECB may still cut policy interest rates this week it is not obvious that the other central banks will follow suit despite growing pressure for easier policy. Against this background risk measures will remain highly elevated while core bond yields will remain suppressed and the USD will remain on the front foot.
The weaker than forecast US May jobs report has really set the cat among the pigeons. The prospects of more Fed quantitative easing is firmly back on the table and while Fed Chairman Bernanke is unlikely to countenance such action in his testimony this week, the market will still speculate on this option. Consequently the USDs one way bet is not longer so clear cut despite the elevated level of risk aversion providing some support for the currency.
Ahead of Bernanke’s testimony on Thursday the USD will struggle to make too much headway leaving the currency to consolidate its gains in the short term. Other US data releases this week are inconsequential for FX markets although the Fed’s Beige Book will be watched for clues ahead of the Fed’s 19-20 June FOMC meeting.
EUR/USD is well off its lows and will consolidate ahead of Thursday’s ECB meeting. Event risk is high and various rumours have resulted in a cautious tone for EUR bears. Talk of a ‘secret master plan’ consisting of structural reforms, banking union, fiscal union and political union to save the EUR as well as of the ECB buying sovereign bonds will keep markets wary of aggressively selling EUR from current levels. Attention is centred on Spain and its banking sector and debate about the country is next in line for a bailout.
Worries about Spain and of course the outcome of Greek elections on June 17 will limit any bounce in the EUR. Nonetheless, speculative positioning in EUR/USD reached another all time low in the latest week according to the CFTC IMM data, suggesting that scope for short covering is growing. EUR/USD will find technical support around its 2012 low around 1.2287 while upside potential will be restricted to resistance around 1.2505.