Euro weakens sharply against Sterling and Yen today after weaker than expected confidence data. German Ifo business climate dropped to 106.3 in August versus expectation of 107.1, hitting a 13-month low. Current assessment gauge dropped to 111.1 versus expectation of 112.0. Expectations gauge dropped to 101.7 versus expectation of 102.1. Ifo president Hans-Werner Sinn noted that the German economy “continues to lose steam” and companies were “less satisfied with their current business situation.” Ifo economists Klaus Wohlrabe said that the institute might lower Germany’s growth forecast for 2014 to 1.5%, down sharply from current projection of 2.0%. And he noted that Q3 growth could be nearly flat.
Last week, ECB President Mario Draghi called in the Jackson Hole symposium for more fiscal work. According to him, “it would be helpful for the overall stance of policy if fiscal policy could play a greater role alongside monetary policy, and I believe there is scope for this, while taking into account our specific initial conditions and legal constraints”. Meanwhile, he noted that ECB will acknowledge recent development in price data and use “all available instruments needed to ensure price stability over the medium term. He was referring to the fact that 5-year, 5-year inflation swap rate dropped below 2% this month for the first time since October 2011. That’s ECB’s preferred gauge of inflation expectations. Draghi’s overall tone pushed the ECB closer to QE as deflation risks increase. There were talks in the market that ECB could launch a QE program by the end of the year.
Dollar surged as the week started but pare back some against against other major currencies. Last week, Fed Chair Janet Yellen delivered a balanced speech regarding the US labor market and monetary policy in the Jackson Hole symposium. She acknowledged that recent labor market data have performed better than the Fed’s forecasts and discussed the cyclical and structural factors contributing to the current employment situation. Yellen judged that cyclical factors remained prominent as significant underutilization remains. Therefore, policymakers should stay patient to the gradual move toward the exit. Overall, the comments have not changed the dovish stance of the Fed and have not done much to alter the central bank’s monetary policy outlook. More in Yellen’s Speech Was Balanced, Yet Dovish.
Looking ahead, US durable goods orders due tomorrow might show a 7.5% rise after a jump in aircrafts orders. The core reading would largely be flat. The second estimate of 2Q14 GDP would be revised modestly lower to 3.9% from the primary reading of 4%. Core PCE deflator and personal income/spending would be released on August 29. In Japan, the unemployment rate due on Friday probably stayed at 3.7% in July with the jobs/applicants ratio at 1.10. CPI probably fell to 3.4% in July from 3.6% in the prior month. The reading remains high as the effect of sales tax hike remained there. Core CPI probably stayed unchanged at 3.3%, while the leading Tokyo core CPI dipped -0.1% to 2.7%. In the Eurozone, the unemployment rate in Germany probably stayed at 6.7% while the number of unemployed continued to fall. The 18-nation region flash CPI estimate might have eased to 0.4% y/y in August to 0.3%, pushing the Eurozone closer to deflation.
Here are some highlights:
- Tuesday: New Zealand trade balance; US durable goods orders, house price indices, consumer confidence
- Wednesday: Swiss UBS consumption indicator; German Gfk consumer sentiment
- Thursday: German CPI, unemployment, Eurozone M3; Swiss employment; US GDP, jobless claims, pending home sales
- Friday: Japan CPI, unemployment, industrial production, retail sales, housing starts; Swiss KOF; German retail sales, Eurozone CPI, unemployment; Canada GDP, IPPI and RMPI; US personal spending and income, Chicago PMI
Daily Pivots: (S1) 1.6556; (P) 1.6576; (R1) 1.6593; More…
A temporary low is in place at 1.6534 with 4 hours MACD crossed above signal line. Intraday bias in GBP/USD is turned neutral for some consolidations first. Upside of recovery is expected to be limited by 1.6737 resistance and bring fall resumption. The decline from 1.7190 medium term top is expected to extend lower. Below 1.6534 will target 1.6251 cluster support (38.2% retracement of 1.4813 to 1.7190 at 1.6282).
In the bigger picture, price actions from 1.3503 (2009 low) are treated as consolidations to long term down trend from 2.1161. The current development, with medium term top formed at 1.7190, argues that such consolidation is possibly completed, just below 50% retracement from 2.1161 to 1.3503 at 1.7332. Focus now turns to 55 weeks EMA (now at 1.6506). Sustained trading there will pave the way for 1.4813 key support and below.