[B]Eurozone GDP and UK unemployment in focus today[/B]
Today’s UK opening call provides an update on:
• Eurozone expected to remain in recession;
• France to enter recession in the first quarter;
• UK jobless claims to fall for sixth consecutive month, while wage growth remains an issue;
• Sir Mervyn King to hold one of his final press conferences as BoE Governor.
European stock indices are expected to open higher on Wednesday, ahead of the release of eurozone GDP figures and UK unemployment data.
Data released this morning is expected to confirm that the eurozone remained in recession in the first quarter, after contracting by 0.1%. The fact that only a marginal contraction is expected means we could actually see the eurozone move out of recession, with no or a small amount of growth, which would undoubtedly prompt a very positive reaction in European stocks and the euro.
That said, I think it’s far more likely that the contraction will be bigger than is currently forecast, meaning the eurozone is actually deeper in recession than we thought. While some of the recent German data has been encouraging, the same can’t be said of that from most of the other eurozone countries. Therefore, anything other than a contraction figure here is extremely unlikely.
We also have many individual eurozone countries releasing GDP figures throughout the morning, although we’re unlikely to see many surprises here. The German figure has the potential to surprise to the upside, after what was in the main, a pretty good quarter for the country, under the circumstances. I think growth expectations of 0.3% may be overly conservative here, especially following a 0.6% contraction. I’ll be very surprised if this doesn’t come in above market expectations, providing a boost early in the session.
I don’t see the other figures giving us too much to be optimistic about. France is expected to be confirmed as back in recession after a woeful first quarter. Expectations are for growth of around -0.1%, which could actually prove to be overly optimistic given the rest of the data we saw in the first three months of the year. Meanwhile, Italy, Greece and Portugal are expected to remain deep in recession, with little hope of returning to growth this year.
In the UK, unemployment is expected to remain at 7.9%, while the number of jobless claims are expected to fall for the sixth consecutive month. Despite being much higher than pre-financial crisis levels, the unemployment rate in the UK isn’t actually too bad, especially when compared to many of the countries in the eurozone. One of the biggest concerns in the UK at the minute is real incomes which are being hit by high inflation and minimal wage increases. Data released this morning is expected to show this is still the case, with average earnings growing only 0.7% in the last three months, compared to a year ago.
Sir Mervyn King will make one of his final appearances as Bank of England Governor, when he holds a press conference with other MPC members later on this morning. At the same time, the BoE inflation report will be released. This is unlikely to fill us with optimism about the outlook for the UK, despite seeing some promising signs as of late.
These projections have proven to be incredibly inaccurate over the last few years so you should really take them with a pinch of salt. On top of that, we have a new BoE Governor starting in July, which will probably change the inflation projections entirely, depending on how the central bank addresses the issue of low growth and high inflation. The press conference is likely to be used as an opportunity to find out how the voting went at the last meeting, with King so far being unable to convince the other policy makers to vote in favour of an additional GBP25 billion of asset purchases, probably due to the fact that he retires after the next meeting.
Later on in the US, the focus is likely to remain on economic data, with the empire state manufacturing index and industrial production figures attracting particular attention. We also have crude oil inventories out later, which are expected to rise slightly to 0.5 million.
[B]EURUSD[/B]
The euro failed again yesterday to close back above 1.30 and the 200-day SMA. The fact that we’ve now had two failed attempts to close above here since breaking below goes some way to supporting the bearish outlook for this pair, at least in the short term. The next target for me is still around 1.28, due to the size of the double top that the pair broke below on Friday. This is a major level for the pair, as it is the neckline of the head and shoulders which has formed over the last eight months. If we see a break here, it could prompt a move back towards 1.18, based on the size of the formation. Alternatively, we could see this act as support, prompting a move higher. If the pair does continue to slide, it should find support around 1.2910, 1.2876, 1.2863 and 1.2843. If it continues to edge higher, the next resistance levels should come around 1.2954, 1.2988 and 1.30.
[B]GBPUSD[/B]
Sterling is continuing to slide against the dollar, since bouncing off the 50 fib level earlier this month. Since then, the pair has broken below the middle bollinger band last week, followed by the ascending channel on Monday. Yesterday, the pair closed below the 50-day SMA for the first time since breaking above it back at the start of April, which only added to the bearish outlook for the pound. The pair is trading slightly higher this morning, although I don’t expect it to gain any real momentum. We could see it test the 50-day SMA as a new level of resistance before continuing to head south. What we now have on the weekly chart is a textbook flag formation, which again supports the bearish outlook, especially since it broke below the flag. Now that the pair appears to have broken those big support levels around 1.53, I see no reason why it won’t target this year’s lows of 1.4830, finding support along the way around 1.52, 1.5088, 1.5030 and 1.50.
[B]USDJPY[/B]
The dollar is continuing to push higher against the yen this morning. The rally in the pair, since breaking above 100, doesn’t appear to be running out of steam, which is surprising since it’s currently trading above a level that was previously a major level of support. That suggests we could see it reach 105.57, the 61.8 fib level, earlier than expected. That said, I would be very surprised if we don’t have a significant pull back before then. The pair is currently finding resistance around 102.60, a previous support level, with the next big resistance level being around 103.75.
Ahead of the open we expect to see…
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